Question
An individual has preferences over two goods (x and y) that are represented by the utility function U = 1 2min{x, y}. The individual has
An individual has preferences over two goods (x and y) that are represented by the utility function U = 1 2min{x, y}. The individual has income $60, the price of x is $4 and the price of good y is $2. (a) What kind of goods does the individual consider x and y to be? (b) What is the level of satisfaction a consumer would report if they had the following {x, y} bundles : A = {0, 15}; B = {2, 11}; C = {12, 10}. (c) What is this individual's budget constraint? Which of the bundles above are in the budget set and which are on the budget line? (d) What is this individual's optimal bundle of x and y? [HINT: You can't calculate MRS, but you know something about the mix of x and y that any reasonable individual would choose] (e) Suppose the price of good x falls by 0.50. What is the new optimal bundle? Explain your result and why it is similar or different to your answer in part d).
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