Answer all parts (a)- (d) of this question. Let the utility function be given by U(x 1
Question:
Answer all parts (a)- (d) of this question.
Let the utility function be given by
U(x 1 , x 2 ) = √x 1 + x 2 .
Let m be the income of the consumer, p 1 and p 2 the prices of good 1 and good 2, respectively. To simplify, normalize the price of good 1, that is p 1 = L 1 .
(a) Write down the budget constraint and illustrate the set of feasible bundles using a figure.
(b) Suppose that m = L100 and that p 2 = L10. Find the optimal bundle for the consumer. In other word, find the combination of x 1 and x 2 that maximizes the consumer’s utility when the prices are p 2 = L10, p 1 = and her income is m = L100.
(c) Suppose still that m = L100 but now the price of good 2 has increased to p 2 = L30. Find the optimal bundle for the consumer. In other words, find the combination of x 1 and x 2 that maximizes the consumer’s utility whent the prices are p 2 = L30, p 1 = L1 and her income is m = L100.
(d) How can we explain the drastic change in demand for the goods when the price of good 2 increased from L10 to L30?Expert Answer:
When demand changes due to changes in prices keeping other factors same is known as expansion or con... View the full answer
