Suppose that U = XY . The prices of good X and good Y are $10...

Suppose that U = XY . The prices of good X and good Y are $10 and $5, respectively. How many units of good X does the consumer buy if she has $1000 of income?

a) 10

b) 25

c) 50

d) 41

Solutions

Expert Solution

the consumer optimizes according to the following condition:

MRS = MUx/MUy = Px/Py

=> Y/X = 10/5

=>Y = 2X

=> X = Y/2

Budget equation is:

X*Px + Y*Py = Income

=> 10X + 5Y = 1000

Putting Y = 2X in the equation, we get

10X + 5*2X = 1000

=> 20X = 1000

=> X = 1000/20 = 50

Thus, the answer is (c) 50

Rahul Sunny answered 1 year ago

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