How individuals obtain utility from food and other good

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Reference no: EM1358084

Suppose individuals require a certain level of food (x) to remain alive. Let this amount be given by X0. Once X0 is purchased, individuals obtain utility from food and other goods (y) of the form
U(x,y)=(x-x0)^a*Y^b, where a+b=1

a. Show that if I>Px*X0 then the individual will maximize utility by spending a(I-Px*Xo)+Px*X0 on good x and b(I-Px*X0) on good Y, Interpret this result.

b. How do the ratios Px*X/I and Py*Y/I change as income increases in this problem? (See also Extension E 4.2 for more on this utility function.)

Reference no: EM1358084

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