a) Find the optimum purchases of X1 and X2 for the following information: U = utility...

a) Find the optimum purchases of X1 and X2 for the following information: U = utility = X4 1 X2, P1 = price of X1 = 4, P2 = price of X2 = 5, and y = income = 25.

Calculate also the maximum level of utility.

b) Assume the individual receives 4 of X2 as a gift. The individual can sell his gift if he wishes. Find his new optimum purchases of X1 and X2. Explain also diagrammatically.

c) Now assume that the individual cannot sell his gift. Find his optimum purchases of X1 and X2. Is the individual happier in case (b) or in case (c)? Explain and prove your answer. d) Suppose in case (a) the price of X2 falls to P2 = 4. What is the consumer surplus gain for the new optimum purchase of X2?

Expert Solution

Answer of all the parts are attached below:

Rahul Sunny answered 1 year ago

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