Katie Kwasi's utility function is U(x₁, x₂) = 5(ln x₁) + x₂. Given her current income and the current relative prices, she consumes 10 units of x₁ and 15 units of x₂. If her income doubles, while prices stay constant, how many units of x₁ will she consume after the change in income? A) 10 B) 15 C) 5 D) 20 E) There is not enough information to determine how many.

Question

Quizplus · Accepted Answer

Since prices have remained constant, Katie's budget line will shift outwards parallel to the initial budget line. Her income has doubled, and since she is not necessarily cornered, she can afford all of the original bundle and the new bundle, indicating that the new bundle is not below the original bundle on the higher budget line. Thus, the amount of x₁ she consumes remains the same.

Katie Kwasi's Utility Function Is U(x1, X2) = 5(ln X1)

Katie Kwasi's Utility Function Is U(x₁, X₂) = 5(ln X₁)