Question
Janice consumes two goods, X and Y. Janice has a utility function given by the expression: U = 4X0.5Y0.5 So, MUX =2Y0.5/X0.5 and MUY =
Janice consumes two goods, X and Y. Janice has a utility function given by the expression: U = 4X0.5Y0.5 So, MUX =2Y0.5/X0.5 and MUY = 2X0.5/Y0.5. The current prices of X and Y are RM25 and RM50, respectively. Janice currently has an income of RM750 per time period. (a) Calculate the optimal quantities of X and Y that Janice should choose, given her budget constraint. Graph your answer. [ 9 marks ] (b) Suppose that the government rations purchase of good X such that Janice is limited to 10 units of X per time period. Assuming that Janice chooses to spend her entire income, how much Y will Janice consume? On the same graph shows the impact of the limited availability of X. Is Janice satisfying the usual conditions of consumer equilibrium while the restriction is in effect? [ 6 marks ] (c) Calculate the impact of the ration restriction on Janice's utility. [ 5 marks ]
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