Unformatted text preview: would you tell her? ANS: Take the comm class and you’ll end up with a higher GPA! 2) Suppose that Max has the utility function u(x, y) = x(y + 1). The price of x is $2 and the price of y is $1. Income is $10. How much x does Max demand? How much y? If his income doubles and prices stay unchanged, will Max's demand for both goods double? ANS: ERS = Px/Py = 2. MRS = MUx/MUy = (y+1)/x. Now set MRS = ERS and get (y + 1)/x = 2. The budget constraint is 2x + 1y = 10. Solve these two equations simultaneously to find that x = 11/4 and y = 9/2. If his income doubles and prices stay unchanged, his demand for both goods does not double. A quick way to see this is to note that if quantities of both goods doubled, the MRS would not stay the same and hence would not equal the price ratio, which has stayed constant. Econ 313.1  Wissink  Fall 2005 PS#2 – XtraQ  ANSWERS 90 x y comm ICcomm BLcomm 90 45 x y 45 econ ICecon BLecon 90 90...
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 Fall '06
 MASSON
 Economics, Utility, Nancy Lerner

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