Harry consumes 2 goods, X and Y and he spends N$60 per month. The price of good X is N$4 and the price of good Y is N$10. Harry's utility function is U(X, Y) = XY. ) What is Harry's marginal rate of substitution? (5) (ii) What is the expression for Harry's budget constraint? (3) (iii) What is the slope of Harry's budget constraint? (2)

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Chapter21: The Theory Of Consumer Choice
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Harry consumes 2 goods, X and Y and he spends N$60 per month. The price of good X is N$4
and the price of good Y is N$10. Harry's utility function is U(X, Y) = XY.
(i) What is Harry's marginal rate of substitution? (5)
(ii) What is the expression for Harry's budget constraint? (3)
(iii) What is the slope of Harry's budget constraint? (2)
(iv)Find the values of good X and Y maximizes Harry's utility. Show all your work. (6)
(v) Illustrate Harry's utility maximizing combination on a clearly labelled graph. (4)
(vi) Suppose the price of good X increased to N$6. Illustrate Harry's income and substitution
effects on a well labelled graph. Show your work. (10)
(vii) Suppose Genie is consuming two goods, coffee and beer. She spends all her income on
a combination of coffee and beer where MUcoffee/Peoffee is 5 and MUbeer/Pbeer is 3.
Explain why this combination is not maximizing her satisfaction. What should she do
to maximize her utility? (5)
Transcribed Image Text:Harry consumes 2 goods, X and Y and he spends N$60 per month. The price of good X is N$4 and the price of good Y is N$10. Harry's utility function is U(X, Y) = XY. (i) What is Harry's marginal rate of substitution? (5) (ii) What is the expression for Harry's budget constraint? (3) (iii) What is the slope of Harry's budget constraint? (2) (iv)Find the values of good X and Y maximizes Harry's utility. Show all your work. (6) (v) Illustrate Harry's utility maximizing combination on a clearly labelled graph. (4) (vi) Suppose the price of good X increased to N$6. Illustrate Harry's income and substitution effects on a well labelled graph. Show your work. (10) (vii) Suppose Genie is consuming two goods, coffee and beer. She spends all her income on a combination of coffee and beer where MUcoffee/Peoffee is 5 and MUbeer/Pbeer is 3. Explain why this combination is not maximizing her satisfaction. What should she do to maximize her utility? (5)
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