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Problem 1 Suppose that a consumer has an income of $80 that she would like to spend on two goods x and y to maximize
Problem 1 Suppose that a consumer has an income of $80 that she would like to spend on two goods x and y to maximize her utility. The market prices of the goods are P = $4 and P, = $3 per unit, respectively. The consumer's utility function is given by U (x, y) = x0.7y0.3. Determine the consumer's utility maximizing choice of x and y. Hints: Determine the marginal rate of substitution (MRS) from the utility function and marginal rate of transformation (MRT) from the budget line. Set MRS = MRT and solve for y: y on the LHS and others on the RHS. Substitute the expression of y in the budget equation and solve for x. Substitute the value of x in the expression of y that you got from MRS = MRT.
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