John has a utility function for goods x1 and x2 which is represented by u(x1,x2)=x10.2x20.8. Assume her income is 100 TL and the prices of x1 and x2 are 10 TL and 20 TL, respectively. a) Express the marginal rate of substitution (MRS) between goods x1 and x2. As the amount of x1 increases relative to the amount of x2 along the same indifference curve, does the MRS increase or decrease? Explain. b) Derive the demand functions for goods x1 and x2.

MU1 = u/x1 = 0.2 x (x2 / x1)0.8 MU2 = u/x2 = 0.8 x (x1 / x2)0.2 MRS = MU1 / MU2 = (0.2 / 0.8) x (x2…

Answered: John has a utility function for goods…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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John has a utility function for goods x₁ and x₂which is represented by u(x₁,x₂)=x₁^0.2x₂^0.8. Assume her income is 100 TL and the prices of x₁ and x₂ are 10 TL and 20 TL, respectively.

a) Express the marginal rate of substitution (MRS) between goods x₁ and x₂. As the amount of x₁ increases relative to the amount of x₂ along the same indifference curve, does the MRS increase or decrease? Explain.

b) Derive the demand functions for goods x₁ and x₂.

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