Beth consumes two goods, x₁and x₂, and her income is $120. The price of x₁is $10, and the price of
X₂is $5. If her utility function is U(x₁,x₂) = min(x₁,x₂) , her utility maximizing bundle is:

Question

Quizplus · Accepted Answer

To maximize her utility, Beth will allocate her income to the two goods in a way that the marginal utility per dollar spent is equal for both goods. The marginal utility of x₁is constant at 1, while the marginal utility of x₂decreases as consumption increases. Initially, Beth will purchase only x₁, as it provides a higher marginal utility. She will continue to purchase x₁units until the marginal utility of x₂is equal to 1. At this point, she will start purchasing x₂as well. The total amount spent on x₁will be $80 (8 units * $10 per unit), and the total amount spent on x₂will be $40 (8 units * $5 per unit). Therefore, the utility maximizing bundle for Beth is (8, 8).

Beth Consumes Two Goods, X1 and X2, and Her Income

Beth Consumes Two Goods, X₁and X₂, and Her Income