Milton consumes two commodities in a perfect market system. The price of x is $5 and the price of y is $1. His utility function is U(x, y) = xy. He is endowed with 40 units of good x and no y. Find his consumption of good y.

Question

Quizplus · Accepted Answer

Milton will sell his 40 units of x for $5 each, giving him $200. He will spend all his money on good y, which costs $1 per unit, allowing him to buy 200 units of y. However, to maximize utility U(x, y) = xy, he will consume equal amounts of x and y, so he will consume 20 units of x and 100 units of y.

Milton Consumes Two Commodities in a Perfect Market System