Reference no: EM13153876
Suppose Alex's utility function for tops (x) and candy (z) is: U(x,z)= x¾ z¼ . Suppose this year she has income of 1,000 to spend on these two goods. The price of a unit of x is $25 and the price of a unit of z is $5. Her marginal utility of x is MUx= 3z¼ /4x¼ . Her marginal utility of z is MUz= x¾/ 4z¾
a) With z on the verticle axis, what is the equation for her marginal rate of substitution?
b) With z on the left hand side of the equation, what is the equation for her budget constraint?
c) What is the equation for her marginal rate of transformation?
d) Use this information to solve for Alex's optimal amount of x per year
e) what is Alex's optimal amount of z per year?
f) Now suppose Alex's income increases to $1,500 per year. What is her new optimal consumption of x?
g) What is her new optimal consumption of z?
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