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Micro 5

The document presents two consumer problems involving budget constraints and utility maximization. For the first problem, the consumer's budget line is Y = 60 - 3X, with optimal quantities of goods X and Y being 10 units and 30 units, respectively. In the second problem, Ms. Lan's budget line is Y = 200 - 4X, leading to optimal quantities of 26 kg of meat and 96 kg of potatoes to maximize her utility.

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3 views

Micro 5

The document presents two consumer problems involving budget constraints and utility maximization. For the first problem, the consumer's budget line is Y = 60 - 3X, with optimal quantities of goods X and Y being 10 units and 30 units, respectively. In the second problem, Ms. Lan's budget line is Y = 200 - 4X, leading to optimal quantities of 26 kg of meat and 96 kg of potatoes to maximize her utility.

Uploaded by

mthu220106
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Problem 1: Suppose that a consumer who uses $60 to buy 2 goods: X and Y.

Given
that price of the good X is $3 per unit and price of the good Y is $1 per unit. Suppose
that the utility function of this consumer is TU=XY
1. Identify the budget line equation for this consumer
2. Identify MUx, MUy and MRSxy
3. What are optimal quantity of good X (X*) and optimal quantity of good Y (Y*) that he
should buy to maximize his utility.
Answer
1.
Budget line equation for consumer :
XpX + YpY = I
X3 + y.1 = 60
Y= 60-3X
2.
MUx= (TUx)’ = (XY)’x = Y
MUy= (TUy)’ = (XY)’y = X
MRSxy = MUx/MUy = Y/X
3.
-In order to maximize his utility: I=P X+P Y and MU /P =MU /P (=>MU /MU =P /P
x y x X Y y x y x y

⇔Y/X=3/1=3)
⇔3X+Y=60 and Y=3X

=>X=10(units) and Y=30(units)

-So, optimal quantity of good X(X*) and optimal quantity of good Y(Y*) is 10 units and
30 units respectively in order to maximize his utility

Problem 2: Monthly, Ms. Lan spends 1 million VND for buying meat (X) and potato (Y).
Price of meat is 20,000 dong/kg and price of potato is 5000 dong/kg.

a. Identify Lan’s budget line equation and draw that BL curve.

b. Assume that Lan’s utility function for meat and potato is TU= (X-2).Y, what is Lan’s
optimal choice between meat and potato to maximize her total utility?

Answer

⇔4X+Y=200
a. Lan's budget line equation: 20000x+5000y=1000000

⇔y=200-4x
The budget line will go from point (0, 200) to (50, 0) on a graph.
b. -We have the utility function for potato and meat is: TU=(X-2)Y

So the marginal utility for meat is MU =(TU)’x=Y


x

And Mu =(TU)’ =X-2


y Y

-To calculate the amount of goods to maximize Ms. Lan’s total utility, we based on
budget line and indifference curve.

=>In order to maximize her utility: I=P X+P Y and MU /P =MU /P


x y x x Y Y

=>MU /MU =P /P
x y x Y

⇔Y(X-2) =20,000/5,000=4
⇔20,000X+5,000Y=1,000,0000 and 4X-Y=8

=>X=26(kg) and Y=96(kg)

-So, optimal quantity of good X(X*) and optimal quantity of good Y(Y*) is 26 kilograms
and 96 kilograms respectively in order to maximize her utility.

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