1. The market for x and y in Waketowne consists of 5000 people. Of this population,...

1. The market for x and y in Waketowne consists of 5000 people. Of this population, 2500 have preferences for the two goods in which the consumers earn utility by U = (xy)^1/2. There are 1500 consumers who get utility from consuming the goods by U = x^3/5y^2/5. Finally, the other 1000 consumers have preferences of U = x^2/5y^3/5.

All have a budget constraint of 25 = 10x + 5y.

What is the market quantity of x demanded in Waketowne? Also, find another point on the market demand curve for this good. (Hint: The last subgroup of consumers will buy 1000 units of x.)

2. Let us say that a person likes x and y and has preferences, resources, and faces prices that lead them to conclude he should consume 4x and 3y each month to maximize utility. However, for some reason, he continually chooses 5x and 2.5y. Explain why this person is acting irrationally.

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Expert Solution

Rahul Sunny answered 1 year ago

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