Charlie has a utility function U(x, y) = (x + 3)(y + 4). The price of x is $1 and the price of y is $1. When he maximizes his utility subject to his budget constraint, he consumes positive amounts of both goods. Charlie consumes
A) 2 more units of x than he consumes of y.
B) 1 more unit of x than he consumes of y.
C) exactly as many units of x as of y.
D) 1 more unit of y than he consumes of x.
E) None of the above.

Question

Quizplus · Accepted Answer

Charlie's utility function is U(x, y) = (x + 3)(y + 4). The budget constraint is x + y = I, where I is his income. To maximize utility, set the marginal rate of substitution (MRS) equal to the price ratio. MRS = (y + 4)/(x + 3) = 1. Solving this with the budget constraint gives x = y + 1.

Charlie Has a Utility Function U(x, Y) = (X