Find optimal consumption bundle of gasoline and electricity

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Reference no: EM131242436

Suppose that the preferences a typical American has for quantities of electricity (E) and gasoline (G) is given by U(E,G) = a ln(E) + (1 - a) ln(G)

Where 0 < a < 1. Suppose the prices of gasoline and electricity in the units provided are both $1/unit and the consumer has an income of $100. Suppose in addition, the government has chosen to ration electricity by allowing a maximum consumption of 50 units of electricity (E ≤ 50).

a. If a = .25, find the optimal consumption bundle of gasoline and electricity. Does the electricity rationing constraint have an influence on consumer's choice?

b. If a = .75, find the optimal consumption bundle of gasoline and electricity. Does the electricity rationing constraint of the government have an influence on the consumer?

Reference no: EM131242436

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