Chapter 10, Problem 7P

To determine

Concept introduction:

Budget line: it is defined as the combination of all goods that a consumer can purchase, exhausting all 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 an additional unit of a good. It may be diminishing, increasing, or constant.

or

Here,

• is the marginal utility.
  
• is the total utility.
  
• X is the quantity of any good.

Maximizing utility Principle: Maximizing utility in the case of two goods states that the equilibrium level of consumption of the two goods for a consumer is achieved when the Marginal Utility per dollar of two goods are equal, provided that 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