1 answer

HW#8. (8 points) Peter also likes coffee (x) with sugar (y), but his utility function is...

Question:

HW#8. (8 points) Peter also likes coffee (x) with sugar (y), but his utility function is U(x, y) = 5x + 4y. Peter has purchased 4 ounces of coffee and 5 grams of sugar.
(i) Compute the marginal utilities of coffee and of sugar, as well as the marginal rate of substitution of coffee for sugar at this point.

(ii) Please draft a detailed sketch of Peter’s indifference curve that contains his purchase.

#11. (12 points) Recall Peter of problem #8 of homework 1.1. His utility function is u(x, y) = 5x + 2y where x is the number of ounces of coffee and y is the quantity of sugar in grams. Let unit prices be given by Px = 6 cents, Py = 2 cents, and assume that Peter has $9 to spend on coffee and sugar. Find Peter’s best choice, in terms of quantities of coffee and sugar. Illustrate it graphically.

(only solve #11 )


Answers

Answering question 11, as it's mentioned that only #11 should be answered.

Since the preferences are perfect substitutes, so only one good is consumed.

We compare the MU per unit of the price & the good whose MU/price, is higher, only that good is consumed at the equilibrium.

Bcoz if additional money spent on one good is providing higher extra utility then the whole budget should be spent only on that good, if preferences are perfect substitutes.

optimao ons n point 4. 5 B.C. Px Consu med) 3) 1.5 .eepen thanD, o onty -O

.

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