Consider an individual with utility for a composite good (X) and indoor air qual
ID: 1195538 • Letter: C
Question
Consider an individual with utility for a composite good (X) and indoor air quality (Q): U = XQ. Indoor air quality depends on pollution levels outside (P) and defensive expenditures (D): D = PQ^2. Let the individual’s income be Y.
1. Write down the individuals utility maximization problem subject to a budget constraint, mathematically.
2. Suppose Y = 10 and P = 1. What are the optimal amounts of X and Q?
3. What happens to the optimal X and Q when P increases to 2?
4. What happens to the optimal X and Q when Y increases to 20?
Explanation / Answer
Consider an individual with utility for a composite good (X) and indoor air qual