Luc Duy Khanh

Student ID: 11212842

Class: EBBA 13.1
Problem 1:
Suppose that a consumer who uses $60 to buy 2 goods: X and Y.
Given that price of the good X is $3 per unit and price of the good Y is $1
per unit. Suppose that the utility function of this consumer is TU=XY
Answer
1. Identify the budget line equation for this consumer
- Subjects: I = 60$ , Px = 3$ , Py = 1$
- We have: Px. X + Py. Y = I
 3X + Y = 60
 Y = 60 − 3X
2. Identify MUx, MUy and MRSxy
- The utility function of this consumer is TU=XY
- Therefore, we have
+) MUx = (TU)’x = Y
+) MUy = (TU)’y = X
MUx Y
+) MRSxy = =
MUy X

3. What are optimal quantity of good X (X*) and optimal quantity of good Y
(Y*) that he should buy to maximize his utility.
MUx MUy Y X
- We have: = <=> = <=> Y = 3X
Px Py 3 1

Y = 3X
=> System of equations: {
Y = 60 − 3X
X = 10
=> Solve the equations: {
Y = 30
Problem 2:
Monthly, Ms. Lan spends 1 million VND for buying meat (X) and potato
(Y). Price of meat is 20,000 dong/kg and price of potato is 5000 dong/kg.
Answer
1. Identify Lan’s budget line equation and draw that BL curve.
- We have: Px. X + Py. Y = I
 20000X + 5000Y = 1000000
 4X + Y = 200
 Y = 200 − 4X

I/P(y)
Budget Line
250

200

150

100

50

0
0 10 20 30 40 50
I/P(x) 60

2. Assume that Lan’s utility function for meat and potato is TU= (X-2).Y, what
is Lan’s optimal choice between meat and potato to maximize her total
utility?
 Px. X + Py. Y = I
-We have the rule of choice: { MUx MUy
=
Px Py

* MUx = (TU)’x = Y
MUy = (TU)’y = X − 2
Y = 200 − 4X Y = 200 − 4X
{ Y = X−2 {
20000 5000
Y = 4(X − 2)

-Solve the set of equations:

 200 − 4X = 4(X − 2)
 8X = 208
 X = 26
-Replace X = 26 on Y = 200 − 4X
 Y = 96