Question

Gloria likes watching movies (x1) and listen to her favorite songs(x2). Her utility function is given by 1 U (x1, x2) = 2x1x2

1. Find Gloria’s MRS, for an arbitrary bundle (x1, x2) .

2. Plot Gloria’s indifference curve that passes through the bundle (1, 1). Find the MRS for this bundle, and depict it on the graph. Which good is "locally more valued" at (1, 1) movies or songs? (Hint: good x is locally more valued than good y at consumption levels (x1,y1) if at these levels of consumption the consumer is willing to give up more than one unit of good y in order to receive one more unit of good x.)

Answer 1

1) MRS = MU1/MU2 = X2/X1

2) IC through (1,1)

IC: 2X1*X2 = 2

X2= 1/X1

MRS = 1

so at (1,1), in order to increase Consumption of X1 by 1 unit, Consumer should give up 1 unit of X2.

so two goods are equally valued