Two firms X and Y produce two goods, also called: X and Y. Each firm has...

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Two firms X and Y produce two goods, also called: X and Y. Each firm has customers on the East and the West sides of town. The aggregate utility function for the East side is U=X0.5+Y0.5. The West side has the following aggregate utility function: U=X0.3+Y0.7. The East side has a weekly income of R10m. The West side has a monthly income of R80m. The price of X is R10 and that of Y is R20. a) Determine the weekly combination of X and Y that the firms' customers would buy. b) Calculate the marginal rate of substitution at the combination that the firm's customers would buy and provide its economic interpretation. c) Suppose the price of Y falls from R20 to R10. Determine the new weekly combination that will be chosen by the firm's customers. d) Determine whether the price-cutting strategy for firm Y is appropriate, by using the concepts of substitution and income effects. Two firms X and Y produce two goods, also called: X and Y. Each firm has customers on the East and the West sides of town. The aggregate utility function for the East side is U=X0.5+Y0.5. The West side has the following aggregate utility function: U=X0.3+Y0.7. The East side has a weekly income of R10m. The West side has a monthly income of R80m. The price of X is R10 and that of Y is R20. a) Determine the weekly combination of X and Y that the firms' customers would buy. b) Calculate the marginal rate of substitution at the combination that the firm's customers would buy and provide its economic interpretation. c) Suppose the price of Y falls from R20 to R10. Determine the new weekly combination that will be chosen by the firm's customers. d) Determine whether the price-cutting strategy for firm Y is appropriate, by using the concepts of substitution and income effects.

Answer rating: 100% (QA)

a To determine the weekly combination of X and Y that the firms customers would buy we need to find the point where the customers indifference curves are tangent to the budget line On the East side th... View the full answer