In: Economics
Jane spends all of her $200 weekly income on two goods, X and Y. Her utility function is given by U(X,Y) = 2XY, If the price of X = $4/ unit and the price of Y = $10 a unit, how much of Y should she buy?
From the above question, we have the following information
Weekly Income = $200
Price of X = $4/unit
Price of Y = $10/unit
So from this information, we can make our budget equation which will be
4X + 10Y = 200 (where X and Y are number of units)
Now we will find the possible values of X and Y which will satisfy this budget equation
X | Y |
50 | 0 |
45 | 2 |
40 | 4 |
35 | 6 |
30 | 8 |
25 | 10 |
20 | 12 |
15 | 14 |
10 | 16 |
5 | 18 |
0 | 20 |
So these combinations or bundles will satisfy the budget equation.
Now we have utility function as U(X, Y) = 2XY so we will put each and every bundle and see which bundle gives the highest utility.
X | Y | U = 2XY |
50 | 0 | 0 |
45 | 2 | 180 |
40 | 4 | 320 |
35 | 6 | 420 |
30 | 8 | 480 |
25 | 10 | 500 |
20 | 12 | 480 |
15 | 14 | 420 |
10 | 16 | 320 |
5 | 18 | 180 |
0 | 20 | 0 |
As (25, 10) gives the highest utility hence Jane will spend her weekly income of $200 by buying 25 units of X at $4 per unit and 10 units of Y at $10 per unit.
So according to the question, Jane should buy 10 units of Y