What are the prices of good x and y

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There is an island called Homothetica in which all people have the same homothetic utility function of U(x; y) = x1=2y1=2 over goods x and y. There are three income groups on the island, and these groups have incomes of $500, $1,000, and $2,000, respectively. Say there are 500 people in each income group. At prices px and py, say that the poorest people consume 20 units of good x and 40 units of good y each.

(a) What are the prices of good x and y?

(b) If the supply of goods x and y on Homothetica totals 50,000 units and 200,000 units, respectively, will there be any excess demand or excess supply of either of these goods at the prices you calculated in Part (a)?

Reference no: EM132407262

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