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You are choosing between two goods, X and Y, and your marginal utility from each is as shown below. if your income is $9 and the price of X and Y are $2 and $1, respectively,

Units of X Marginal Utility for X
1 10
2 8
3 6
4 4
5 3
6 2
Units of Y Marginal Utility for Y
1 8
2 7
3 6
4 5
5 4
6 3

a) What quantities of each will you purchase to maximize utility?
b) What total utility will you realize?
c) Assume that, other things remaining unchanged, the price of X falls to $1. What quantities of X and Y will you now purchase?
d) Using the two prices and quantities for X (the demand for X when price is $1 and the demand for X when the price is $2) derives the price elasticity of demand for X.

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Solution Summary

The expert examines quantities to maximize utility. The total utility that will be realized is determined.

Solution Preview

To maximize utility when given two goods, your first instinct should always be that the MU of two goods should be the same. Intuitively, you should think that if I have apples and oranges, the MU of apple is 4 while the MU of orange is 10, then I should eat more oranges and ...

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