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1. Ivan has the following utility function U(x,y) = In(x) + y where x represents food and y represents other goods. Ivan has £10 to spend on these two goods. Suppose that the initial price of x (Px) is £1 per unit, and that of y (Py) is £1 per unit. (i) What is the Marginal Rate of Substitution at the point X = 10, Y = 10? What is Ivan's optimal bundle? Note that MUx = 1/x and MUy=1. (ii) Explain the method above for finding out Ivan's optimal consumption bundle. To do that, consider what happens when the consumption choice changes.

1. Ivan has the following utility function U(x,y) = In(x) + y where x represents food and y represents other goods. Ivan has £10 to spend on these two goods. Suppose that the initial price of x (Px) is £1 per unit, and that of y (Py) is £1 per unit. (i) What is the Marginal Rate of Substitution at the point X = 10, Y = 10? What is Ivan's optimal bundle? Note that MUx = 1/x and MUy=1. (ii) Explain the method above for finding out Ivan's optimal consumption bundle. To do that, consider what happens when the consumption choice changes.

Principles of Microeconomics
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 1PA
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1. Ivan has the following utility function U(x,y) = In(x) + y where x represents %3D food and y represents other goods. Ivan has £10 to spend on these two goods. Suppose that the initial price of x (Px) is £1 per unit, and that of y (Py) is £1 per unit. (i) What is the Marginal Rate of Substitution at the point X = 10, Y = 10? What is Ivan's optimal bundle? Note that MUx = 1/x and MUy=1. (ii) Explain the method above for finding out Ivan's optimal consumption bundle. To do that, consider what happens when the consumption choice changes.
Transcribed Image Text:1. Ivan has the following utility function U(x,y) = In(x) + y where x represents %3D food and y represents other goods. Ivan has £10 to spend on these two goods. Suppose that the initial price of x (Px) is £1 per unit, and that of y (Py) is £1 per unit. (i) What is the Marginal Rate of Substitution at the point X = 10, Y = 10? What is Ivan's optimal bundle? Note that MUx = 1/x and MUy=1. (ii) Explain the method above for finding out Ivan's optimal consumption bundle. To do that, consider what happens when the consumption choice changes.
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