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Economics

The manger of a firm can spend $700 on two activities, X and Y, that generate benefits for the firm. The cost of X (Cx) is $100 per unit and the cost Y (Cy) is $200 per unit. The Table below gives the marginal benefits for the various levels of activities of X and Y.

Level of Marginal benefit Marginal benefit
Activity of X (MBx) of Y (MBy) X, or Y
_________ ______________ _____________

1 $3000 $7000
2 2500 4000
3 2000 3000
4 1500 2400
5 1000 2200
6 500 2000

a. State the rule for constrained optimization for this problem.

b. Based the above rule, what are the optimal levels of activity X and Y?

c. What is the total benefit at the optimal levels of X and Y?

d. Suppose the manager allocated the budget of $700 by spending on 5 units of X and 1 unit of Y, is this an optimal allocation of the budget on X and Y? Why or why not? What must the manager do to get back to optimality? (Hint: use more of X, or more of Y?)

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Microeconomics, Economics

Category:- Microeconomics
Reference No.:- M959929

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