QUESTION 2 2. Suppose Andy has a utility function of U(x, y)y. The price of Good

Question

QUESTION 2 2. Suppose Andy has a utility function of U(x, y)y. The price of Good X is 2 and the price of Good Y is 1. Which of the following statement is optimal? Oa Andy will spend all the wealth on the consumption of Good X. Andy will spend all the wealth on the consumption of Good Y. O There are multile optimal solutions. Od. All above statements are incorrect. QUESTION 3 3. Suppose Andy has a utility function of U(a, y) 2r +y and a wealth level of 12. The price of Good X is 2 and the price of Good Y is 1. Which of the following statement is optimal? Oa Andy will spend all the wealth on the consumption of Good X b. Andy will spend all the wealth on the consumption of Good Y. OcThere are multiple optimal consumption bundles. d. All above statements are incorrect

Explanation / Answer

Answer
Q2
Option b
Andy will spend all of the money on the good y because from 1 quantity of good x or good y the utility is same but the price of good y is lower so the per dollar utility is higher for spending on good y.
Q3
Answer
Option C
There are multiple optimal consumption bundles
Because the consumption is done of one good if the goods are substitutes and the per dollar marginal utility will be higher but here the per dollar marginal utility is same so any combination of x and y can be brought
MU of x=dU/dx=2, dU/dy=1
per dollar marginal utility=MU/price
per dollar marginal utility of x =2/2=1
per dollar marginal utility of y=1/1=1
so the both have same per dollar marginal utility so purchasing any combination is possible.

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