Question

• Assume that individual , whose income ir biry 10 , con sumer two typer of goods . X and y , whose pricer one ? Px = 2 & Py = 1 , and that the consumer spends all hir income on these goods , use the information in tabl 1.6 so determine the following things / answer the following SUBSHONE

1 Indicate how musch of XBy the indinduat should plurchese to maximized Utility
2 show that the condition for constrained utility maximisation is achieved
3 determine how much total utility the individual receives when he/she maximisation utility

Answer 1

An individual maximizes utility by equalizing the ratios of marginal utility to price between two goods. Decreases in price can increase purchases due to substitution and income effects. Preferences determine utility, with total utility generally increasing at a diminishing rate as consumption rises.

Step-by-step explanation:

To answer the student's question concerning utility maximization, we need to discuss how an individual can maximize utility given a budget constraint and the prices of goods X and Y. The utility-maximizing choice can be determined by comparing the ratios of the marginal utility to price for each good and finding the point where these ratios are equal. This condition is represented as (MUx / Px) = (MUy / Py), where MUx is the marginal utility of good X, MUy is the marginal utility of good Y, Px is the price of good X, and Py is the price of good Y.

A decrease in the price of a product generally leads to an increase in the quantity demanded. This happens for several reasons, including the substitution effect, where consumers switch from other goods to the cheaper one, and the income effect, where consumers feel richer because of the decreased expenditure on the product, allowing them to purchase more.

If an individual's income changes, this typically affects their budget constraint and thus, their consumption choices. For normal goods, an increase in income will shift the budget constraint outward, enabling the purchase of more goods, while for inferior goods, increased income might result in purchasing fewer units of those goods.

The amount of utility an individual receives from consuming a good is determined by personal preferences, as utility is subjective. Total utility is expected to rise with additional consumption initially, but at a decreasing rate, leading to diminishing marginal utility. It is indeed possible for total utility to increase even as marginal utility decreases, as long as each additional unit still adds some positive utility though less than the previous unit.