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Represented by the utility function

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There are only two goods, x and y. Bob's preferences for x and y can be represented by the utility function U(x,y) = 24x - 0.5x^2 +12y - y^2. Bob has a choice. Choice 1: He can buy x and y in Australia. In Australia the price of x is 10 dollars (per unit) and the price of y is 5 dollars (per unit). Choice 2: He can buy x and y in New Zealand. In New Zealand the goods are cheaper: the price of x is 4 dollars (per unit) and the price of y is 4 dollars (per unit). However, Bob would have to spend $63 in airfare (that comes out of his income) to fly to New Zealand.

a. Bob has income of $135. What should he do - buy x and y in Australia or New Zealand? Note: he has to do one or the other: he won't have time to shop in both countries.

b. If Bob could take as much x and y as he wanted for free, how much x and y would he take? (Assume he must consume all of what he takes - he cannot save or resell x and y). 

Reference no: EM132488471

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