Consider that there are two goods, good X and good Y, which are perfectsubstitutes. The consumer has the utility function given by:U(X,Y)= X + aYThe prices of the goods are given by px = 3 and py = 6, respectively. Theincome of the consumer is given by I = 100.a) Choose a value for parameter "a" by yourself. Graphically illustrate thebudget line of the consumer and draw some example indifference curves.Then, find the consumption bundle that maximizes the consumer's utility.b) List the possible outcomes for different values of parameter "a".

a) To be able to show the budget line, we must identify its equation first. Budget line can be…

a) Choose a value for parameter "a" by yourself. Graphically illustrate the budget line of the consumer and draw some example indifference curves. Then, find the consumption bundle that maximizes the consumer's utility. b) List the possible outcomes for different values of parameter "a".

a) Choose a value for parameter "a" by yourself. Graphically illustrate the budget line of the consumer and draw some example indifference curves. Then, find the consumption bundle that maximizes the consumer's utility. b) List the possible outcomes for different values of parameter "a".

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Form Utility

The term utility in general refers to the satisfaction earned from usage of a particular product or service. Utility always plays an important role because it influences various important elements like demand & thereby the price of the good or service as well. Though utility is not easy to measure, various types of economic models can be used indirectly. There can be various types of utilities like economic utility, marginal utility, cardinal utility, form utility.

Question

Consider that there are two goods, good X and good Y, which are perfect
substitutes. The consumer has the utility function given by:
U(X,Y)= X + aY
The prices of the goods are given by px = 3 and py = 6, respectively. The
income of the consumer is given by I = 100.
a) Choose a value for parameter "a" by yourself. Graphically illustrate the
budget line of the consumer and draw some example indifference curves.
Then, find the consumption bundle that maximizes the consumer's utility.
b) List the possible outcomes for different values of parameter "a".

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Identifying the budget line

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Identifying slope of indifference curve

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Plotting the budget line (red) and indifference curves (blue)

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Profit maximizing outcomes in case of perfect substitutes

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Show full answers to a) b) & c)
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ONly parts D-G
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