Victor is the manager of a local bank branch in College Station where he consumes bundles of two commodities x and y. Prices in College Station are px=1 and py=5. He is offered a transfer to Dallas where prices are px=2 and py=8; Victor’s utility function is U(x,y)=xy and his income in College Station is $5000. (Victor’s utility maximization is always characterized by the tangency rule). Will Victor be able to afford what he was buying in College Station if he is offered a salary in Dallas that guarantees his welfare is the same with the transfer?A. YesB. No

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Asked Sep 13, 2019
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Victor is the manager of a local bank branch in College Station where he consumes bundles of two commodities x and y. Prices in College Station are px=1 and py=5. He is offered a transfer to Dallas where prices are px=2 and py=8; Victor’s utility function is U(x,y)=xy and his income in College Station is $5000. (Victor’s utility maximization is always characterized by the tangency rule). Will Victor be able to afford what he was buying in College Station if he is offered a salary in Dallas that guarantees his welfare is the same with the transfer?

A. Yes

B. No

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Expert Answer

Step 1

The utility function is given as U(x, y) = xy. The MUx  and MUy can be written as;

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MU Х y х әх —у дU = X Y ӘҮ MU

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Step 2

It is given that the Px = 1 and Py = 5. Utility maximization can be express as follows;

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MU 'X P. MU. Y P. 1 у 5 x x 5y

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Step 3

The budget const...

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Income x (P)y(Py) 5000 5y 5y 5000 10y y 500

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