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.
A)110
B)105
C)50
D)100
E)None of the above.

Question

Quizplus · Accepted Answer

Milton will maximize his utility by spending all his income on good y, given the prices. He sells his 40 units of x for $200 (40 units * $5/unit) and uses this to buy 200 units of y ($200/$1 per unit).

Milton Consumes Two Commodities in a Perfect Market System