Question

Molly’s utility function is U(x, y) = y + 4x.5. She has 25 units of x and 12 units of y. If her consumption of x is reduced to 0, how many units of y would she need in order to be exactly as well off as before?

Answer 1

Molly would need 30 units of y in order to be exactly as well off as before if her consumption of x is reduced to 0.

Step-by-step explanation:

We can use the concept of "compensated demand" to find the number of units of y that Molly would need in order to be exactly as well off as before. The compensated demand for y is the amount of y that Molly would be willing to consume in order to be exactly as well off as before, holding the consumption of x constant at 0.

The compensated demand for y can be found by solving the following equation for y:

U(0, y) = U(25, 12)

Substituting the given values for U(0, y) and U(25, 12) into the equation above gives:

y + 40.5 = 12 + 425.5

Solving for y gives:

y = 30