Marginal Rate of Substitution and Maximizing the Utility
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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?
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Solution Summary
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.
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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 = ...
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