4. (Quasilinear Preferences) A consumer's preferences over two goods are described by the fol- lowing utility...

 

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4. (Quasilinear Preferences) A consumer's preferences over two goods are described by the fol- lowing utility function: u(x1, x) =x + In x where is the amount of good 1, and x2 is the amount of good 2. Suppose he has $5 available, prices are p = p2 = 1, and she wishes to choose the best affordable bundle (x1, x2), where x1, x2 can be any non-negative numbers: (a) Explain why it is NOT optimal to choose a pair (x1, x2) with x + x2 < 5. (b) Find the optimal bundle. 4. (Quasilinear Preferences) A consumer's preferences over two goods are described by the fol- lowing utility function: u(x1, x) =x + In x where is the amount of good 1, and x2 is the amount of good 2. Suppose he has $5 available, prices are p = p2 = 1, and she wishes to choose the best affordable bundle (x1, x2), where x1, x2 can be any non-negative numbers: (a) Explain why it is NOT optimal to choose a pair (x1, x2) with x + x2 < 5. (b) Find the optimal bundle.

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Optimal Consumption Bundle a Why x1 x2 with x1x2 5 is not optimal Imagine choosing a bundle x1x2 whe... View the full answer