Chapter 10, Problem 5P

To determine

Concept Introduction:

Budget Line: This is defined as the combination of all the goods that a consumer can buy by exhausting all of his income. The formula for the budget line is:

Here,

• is the quantity of good X.
  
• is the quantity of good Y.
  
• is the total income.
  
• is the price of good X
  
• is the price of good Y.
  

Marginal Utility: It is defined as the change in the total utility due to a change in the additional unit of a good. It may be diminishing, increasing, or constant.

Maximizing utility principle: Maximizing utility in the case of two goods state that the equilibrium level of consumption of two goods for a consumer is achieved when the Marginal Utility per dollar of two goods are equal, provided the marginal utility of money is constant. This means that the following conditions must be fulfilled:

Here,

• is the marginal utility of good X.
  
• is the marginal utility of good Y.
  
• is the price of good X.
  
• is the price of good Y.