Homework Answers
Question 3
The utility function is of substitute goods so only one of them
will be consumed depending on the relationship between MRS and
price ratio.
MRS = MUm/MUn =
a. Price ratio = Pm/Pn = 10/20 = 0.5
So, MRS > price ratio. Thus, only m will be consumed.
m = Budget/Pm = 500/10 = 50
So, m = 50; n = 0
b. Price ratio = Pm/Pn = 20/10 = 2
So, MRS < price ratio. Thus, only n will be consumed.
n = Budget/Pn = 500/10 = 50
So, m = 0; n = 50
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