Cecil consumes x₁ and x₂ in fixed proportions. He consumes A units of good 1 with B units of good 2. To solve for his demand functions for goods 1 and 2, A) setand solve for x₁. B) solve the following two equations in two unknowns: Ax₁ = Bx₂ and p₁x₁ + p₂x₂ = m. C) solve the following two equations in two unknowns: Bx₁ = Ax₂ and p₁x₁ + p₂x₂ = m. D) you only need to use the equation given by his budget line. E) use the fact that he spends all of his income on good 1 so long as it is the cheaper good.

Question

Quizplus · Accepted Answer

Cecil consumes goods in fixed proportions, so the ratio Bx₁ = Ax₂ must hold. Additionally, his consumption must satisfy the budget constraint p₁x₁ + p₂x₂ = m. Solving these two equations will give the demand functions for x₁ and x₂.

Cecil Consumes X1 and X2 in Fixed Proportions

Cecil Consumes X₁ and X₂ in Fixed Proportions