Linus has utility function U(x, y) = x + 2y. If the price of x is $1 and the price of y is .50 cents then Linus must consume equal amounts of both goods in order to maximize his utility.

Question

Quizplus · Accepted Answer

Linus' marginal rate of substitution (MRS) is equal to the ratio of the prices of the two goods. In this case, MRS = 2, meaning he is willing to give up 2 units of y for an additional unit of x. Since the price ratio is 1:0.5, he would consume more y than x to achieve the optimal combination of goods. Specifically, he would consume 2 units of y for every unit of x consumed.

Linus Has Utility Function U(x, Y) = X + 2y