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SD&ZY_2010-2011/5 ISL233-M İ KRO İ KT İ SAT-UYGULAMA DERS İ -5 8-9.11.2010 23. George has a fixed income and can afford at most 7 units of Y if he spends his entire income on Y. Alternatively, if he spends all his income on X, he can afford at most 6 units of X. Draw George's budget line and an indifference curve such that George chooses to buy 4 pieces of X. Martha has the same income and faces the same prices, yet she chooses to buy 2 pieces of X. In equilibrium, what is George's subjective value of X in terms of Y? What is Martha's? Solution: In equilibrium, one unit of X will be worth 6/7 units of Y for both George and Martha. The reason is that each consumer choices a consumption bundle so that MRS is equal to the price ratio. 24. Sally consumes two goods, X and Y. Her utility function is given by the expression U = 2 XY 3 . The current market price for X is $10, while the market price for Y is $5.00. Sally's current income is $500. a. Sketch a set of two indifference curves for Sally in her consumption of X and Y. b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial quantities are possible.) (Note: MU Y = 6XY and MU X = 3Y 2 .) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to 15. What would happen to her utility as a result of the price increase?
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This note was uploaded on 02/01/2012 for the course ECON 101 taught by Professor Meonk during the Spring '11 term at Abu Dhabi University.

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