Charlie's utility function is U(x_A_,x_B) = x_Ax_B. If Charlie's income is $40, the price of apples is $4, and the price of bananas is $2, how many apples are there in the best bundle that Charlie can afford? A) 10 B) 12 C) 8 D) 9 E) 5

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Quizplus · Accepted Answer

Charlie's utility function is U(x_A, x_B) = x_A * x_B, which is a Cobb-Douglas utility function. The optimal consumption bundle for Cobb-Douglas preferences is found by spending a fixed proportion of income on each good. Here, the proportion of income spent on apples is equal to the price of apples divided by the sum of the prices of apples and bananas. Solving for x_A, we find that Charlie can afford 5 apples.

Charlie's Utility Function Is U(xA, xB) = XAxB

Charlie's Utility Function Is U(x_A_,x_B) = X_Ax_B