Maximizing Consumer Utility
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Suppose Bob spends his income (I) solely on goods X and Y. Initially, Bob has $1000/week to spend on consumption and the prices of these goods are Px=$4 and Py=$2. Graph the budget constraint for this problem. Given these prices and income, Bob maximizes utility buy consuming X1 and Y1. On the same graph, indicate this utility maximizing bundle. Suppose that the price of Y fall to $1/unit. Illustrate how this changes Bob's budget constraint. Suppose that after the price change, consumption of Y has increased to Y2 but the consumption of X stays the same at X1.
Graphically illustrate the income and substitution effects for both Y and X generated by the price change.
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Solution Summary
The expert will explain a consumer's utility maximization based on two products.
Education
- MBA, Merage School of Business, Univ of Cal, Irvine
- BA, Univ of Cal, Irvine
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