a) Assume that an individual consumes two goods, and achieves the benebitby consuming respectively 1 xand x units of each of the goods. Define the terms indifference curve and budget condition, and show the consumer benefit-maximizing good combination in a chart. Explain why this one the combination solves the utility maximization problem.
a) Assume that an individual consumes two goods, and achieves the benebitby consuming respectively 1 xand x units of each of the goods. Define the terms indifference curve and budget condition, and show the consumer benefit-maximizing good combination in a chart. Explain why this one the combination solves the utility maximization problem.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:a) Assume that an individual consumes two goods, and achieves the benebitby consuming
respectively 1 x and x units of each of the goods.
Define the terms indifference curve and budget condition, and show the consumer
benefit-maximizing good combination in a chart. Explain why this one
the combination solves the utility maximization problem.
b) Assume that the preferences of the consumer can be expressed by the utility function
0.5
ux),4
+ X,
2
p = ard that
and that the price per unit x 1 is ip =, the price per unit x 2 is 2
the income ( m) is 200. Find the consumer's optimal choice in this case.
c) Show on the basis of the utility function given in problem (b) that the demand functions
for the goods are given by
AP2
AP2
m
and · x,
P2
2
P.
x and m are the income of
is the price per unit 1
x , 2 p is the price per unit 2
der
1
the consumer.
d) Explain what is meant by cross-price effects. Be based on
the demand functions in problem (c), and explain how the cross-price effects can
interpreted in this case.
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