Donald consumes goods x and y. His utility function is U(x, y) = xy³. He is endowed with 43 units of x and 7 units of y. The price of x is $1 and the price of y is $3. Find his net demand for x.

Question

Quizplus · Accepted Answer

Donald will sell some of his endowment of y to buy more x. His budget constraint is 43 + 3(7) = 64. The optimal consumption bundle is found by setting the marginal rate of substitution (MRS) equal to the price ratio: MRS = 3y^2/x = 1/3. Solving for x and y, we find x = 16 and y = 4. His net demand for x is 16 - 43 = -27.

Donald Consumes Goods X and Y