Your preference is represented by the utility function: u(x1, x2) = x10.5x20.5 where x1 is potato...

Your preference is represented by the utility function:

u(x₁, x₂) = x₁^0.5x₂^0.5

where x₁ is potato chips (in bags) and x₂ is chocolate bars.

The price of a bag of potato chips is $5 and the price of a chocolate bar is $10.

(a)You have no income, but you received a gift from your uncle. The gift is 9 bags of potato chips and 1 chocolate bar. What is your utility from consuming the gift? Assume that you cannot exchange or return the gift.

(B)If instead of buying you the gift, your uncle gave you the cash that he spent to buy the gift. How many potato chips and chocolate bars would you buy? (They do not need to be whole numbers.) What would be your utility?

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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