An agent has a daily budget of $240 and her daily utility function is the consumption of two goods, X and Y:
U(X, Y) = X Y
If the price for good X (Px) is $8 and that for good Y (Py) is $10, what is the best combination of X and Y for the agent's daily consumption?© BrainMass Inc. brainmass.com October 10, 2019, 8:32 am ad1c9bdddf
The agent's budget function is:
Px * X + Py * Y = Budget
or 8X + 10Y = 240 (1)
The marginal utility of X and Y are
MUx = dU/dX = Y
MUy = ...
The solution provides detailed explanation about the calculation of the marginal rate of substitution and the shows how to maximize the utility given the budget constraint.