Utility maximization :sample problem
Consider the following information: Your income is equal to $ 12. You are to spend that income on goods x and good y. Good x costs $ 2 per unit and Good y costs $ 3 per unit. Show all work.
a. Using your knowledge of utility and consumer behavior and the data below, show exactly how you would spend your income, on which goods and why.
Q MU x MU y
1 90 150
2 84 120
3 80 90
4 60 60
b. At what point do you reach equilibrium? Why is that considered equilibrium?
c. Mrs. Wilson buys loaves of bread and quarts of milk each week at prices of $1 AND 80cents, respectively. At present she is buying these products in amounts such that the marginal utilities from the last units purchased of the two products are 80 and 70util respectively. Is she buying the utility-maximizing combination of bread and milk? if not how should she reallocate her expenditures between the two goods.