Find the utility level sssociated with the optimal bundle

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Reference no: EM131002418

Teresa likes to consume chocolate and yogurt. Her utility function is given by U(x,y) = x^0.5y^0.5 where x and y are the quantities of chocolate and yogurt she consumes. Suppose that her income is $10 and the initial prices for both of the goods is $1. Due to a tropical storm in West Africa, the global price of chocolate suddenly rises to $4. Consider that the price of yogurt is unchanged.

1. Find the utility level U associated with the optimal bundle. (initial level of prices)

2. Find Xs , which is the optimal value of x when the consumer has enough income to reach the level of utility U with the new price levels.

(Hint: Find the income that allows Teresa to reach the utility level U with the new price ratio.)

3. Find the price effects.

Reference no: EM131002418

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