Demand_Min.docx - Question 4 a U = 5min{x1 x2 2x2 has two parts We will either demand both x1 and x2 is the first part i.e 5min{x1 x2 gives higher MU

# Demand_Min.docx - Question 4 a U = 5min{x1 x2 2x2 has two...

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Question 4 a. U = 5min{x 1 , x 2 } + 2x 2 has two parts We will either demand both x 1 and x 2 is the first part i.e. 5min{x 1 , x 2 } gives higher MU than 2x 2 Or we will demand only x 2 if MU gives higher utility per unit of money Case 1: Both x 1 and x 2 are demanded If both x 1 and x 2 are demanded, both will be demanded in equal proportion since we have a min function. So, Demand will be: x 1 = x 2 = I/(P 1 + P 2 ) Utility in this case will be: 5*x 2 + 2*x 2 = 7x 2 = 7I/(P 1 + P 2 ) Case 2: only x 2 is demanded If only x 2 is demanded, the demand will be: X 1 = 0 X 2 = I/P 2 Utility in this case: 0 + 2I/P 2 Demand will be as follows: Demand only X 2 if utility from Case 2 > Utility from Case 1 Both X 1 and X 2 will be demanded if Utility from case 2 < Utility from Case 1

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