Question

Victor is the manager of a local bank branch in College Station where he consumes bundles of two commodities x and y. Prices in College Station are px=1 and py=5. He is offered a transfer to Dallas where prices are px=2 and py=8; Victor’s utility function is U(x,y)=xy and his income in College Station is $5000. (Victor’s utility maximization is always characterized by the tangency rule). Will Victor be able to afford what he was buying in College Station if he is offered a salary in Dallas that guarantees his welfare is the same with the transfer?

A. No.
B. Yes.

Answer 1

B. Yes.

Step-by-step explanation:

The correct answer is Yes. Victor will be able to afford the purchase of commodity x and y in Dallas which he was buying College Station if he is offered same welfare in the transfer. His salary is increased so that his utility remains the same. Utility maximization is expressed by Px / Py = MUx / MUy. Victor will buy the same commodities which he buys in College station to maximize his utility.