3. Susan has the following utility function U(x,y) = xy, where x represents food and y represents other goods. Susan has £20 (budget m) 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. Note that MUx=y and MUy=x. (i) How many units of x and y will Susan purchase? Assuming that Px varies and m and Py stay constant at the values £20 and £2, respectively, what is the individual demand function for x? (ii) What are the characteristics the individual demand function for x? What is its aggregate counterpart, and what is its economic importance?

3. Susan has the following utility function U(x,y) = xy, where x represents food and y represents other goods. Susan has £20 (budget m) 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. Note that MUx=y and MUy=x. (i) How many units of x and y will Susan purchase? Assuming that Px varies and m and Py stay constant at the values £20 and £2, respectively, what is the individual demand function for x? (ii) What are the characteristics the individual demand function for x? What is its aggregate counterpart, and what is its economic importance?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter3: Preferences And Utility

Section: Chapter Questions

Problem 3.7P

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