Question: Ann's utility function is U(x, y) = x + y, with associated marginal utility functions MUx = 1 and MUy = 1. Ann has income

Ann's utility function is U(x, y) = x + y, with associated marginal utility functions MUx = 1 and MUy = 1. Ann has income I = 4.
a) Determine all optimal baskets given that she faces prices Px = 1 and Py = 1.
b) Determine all optimal baskets given that she faces prices Px = 1 and Py = 2.
c) What is demand for y when Px = 1 and Py = 1? What is demand for y when Px = 1 and Py > 1? What is demand for y when Px = 1 and Py < 1? Plot Ann's demand for y as a function of Py.
d) Repeat the exercises in a), b) and c) for U(x, y) = 2x + y, with associated marginal utility functions MUx = 2 and MUy = 1, and with the same level of income.

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a That MU x MU y 1 for all x and y In this case indifference curves are straight lines with slope 1 ... View full answer

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