If the ratio of relative prices is pxpy 63 2 and igors, Ask an Expert

Economics

Igor's preferences for coffee (by the pound) and doughnuts (by the dozen), can be characterized as follows:

• Marginal Utility Coffee = MUx = y2
• Marginal Utility Doughnuts = MUy = 2xy

If the ratio of relative prices is (Px/Py) = 6/3 = 2, and Igor's income is $90 per period, what combination of pounds of coffee and dozens of doughnuts will he choose?

Now let the ratio of coffee to doughnut prices decline to unity (=1), holding the price of doughnuts constant. How does Igor respond to the reduction in the relative price of coffee?

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M960330

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