A consumer of two goods has utility u(x₁, x2) = x²x₂. In addition to her wealth w, the consumer already owns k units of good 1, which she cannot sell (she can, however, purchase more). Thus, for example, if k = 2 and she uses her wealth to purchase 3 units of good 1 and 1 unit of good 2, then she receives utility (3+2)².1 = 25. (a) Sketch this consumer's utility-maximization problem in (₁,2)-space, where ; repre- sents the total quantity consumed of good i (i.e. including the k units of good 1 that she already owns). Solution: The sketch is similar to the typical one except that the budget line is shifted
A consumer of two goods has utility u(x₁, x2) = x²x₂. In addition to her wealth w, the consumer already owns k units of good 1, which she cannot sell (she can, however, purchase more). Thus, for example, if k = 2 and she uses her wealth to purchase 3 units of good 1 and 1 unit of good 2, then she receives utility (3+2)².1 = 25. (a) Sketch this consumer's utility-maximization problem in (₁,2)-space, where ; repre- sents the total quantity consumed of good i (i.e. including the k units of good 1 that she already owns). Solution: The sketch is similar to the typical one except that the budget line is shifted
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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![A consumer of two goods has utility
u(x₁, x2) = x²x₂.
In addition to her wealth w, the consumer already owns k units of good 1, which she cannot
sell (she can, however, purchase more). Thus, for example, if k = 2 and she uses her wealth
to purchase 3 units of good 1 and 1 unit of good 2, then she receives utility (3+2)².1 = 25.
(a) Sketch this consumer's utility-maximization problem in (₁,2)-space, where I repre-
sents the total quantity consumed of good i (i.e. including the k units of good 1 that she
already owns).
Solution: The sketch is similar to the typical one except that the budget line is shifted
to the right by k (leaving a gap from x₁ = 0 up to x₁ = k.)
(b) Find this consumer's Marshallian demand, expressed in terms of quantity purchased (i.e.
not including the k units of good 1 that she already owns).
Solution: In terms of quantity consumed, the utility maximization problem is the same
the usual one given this utility function except that the wealth is w+kp₁ and the nonneg-
ativity constraint on x1 is replaced with ₁ ≥k. Therefore, using the usual Cobb-Douglas
demand formula and subtracting k from ₁ to get the quantity purchased, and then check-
ing the constraint x₁ ≥k, we obtain
x(p, w) =
=
2w-kp1 w+kpi
3p₁ 3p₂
(0, #)
P2
if 2w > kp₁,
otherwise.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fa7d1c47f-ebeb-4433-a23d-a68418d8e04e%2F67d05558-7f43-48b9-b7bd-7b1be43f05a6%2F9i6ppt_processed.png&w=3840&q=75)
Transcribed Image Text:A consumer of two goods has utility
u(x₁, x2) = x²x₂.
In addition to her wealth w, the consumer already owns k units of good 1, which she cannot
sell (she can, however, purchase more). Thus, for example, if k = 2 and she uses her wealth
to purchase 3 units of good 1 and 1 unit of good 2, then she receives utility (3+2)².1 = 25.
(a) Sketch this consumer's utility-maximization problem in (₁,2)-space, where I repre-
sents the total quantity consumed of good i (i.e. including the k units of good 1 that she
already owns).
Solution: The sketch is similar to the typical one except that the budget line is shifted
to the right by k (leaving a gap from x₁ = 0 up to x₁ = k.)
(b) Find this consumer's Marshallian demand, expressed in terms of quantity purchased (i.e.
not including the k units of good 1 that she already owns).
Solution: In terms of quantity consumed, the utility maximization problem is the same
the usual one given this utility function except that the wealth is w+kp₁ and the nonneg-
ativity constraint on x1 is replaced with ₁ ≥k. Therefore, using the usual Cobb-Douglas
demand formula and subtracting k from ₁ to get the quantity purchased, and then check-
ing the constraint x₁ ≥k, we obtain
x(p, w) =
=
2w-kp1 w+kpi
3p₁ 3p₂
(0, #)
P2
if 2w > kp₁,
otherwise.
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