Problem: Warming Up!
Luke likes to consumer CDs (good1) and pizzas (good 2). His preference over both goods is given by the utility functio
U(x1; x2) = x21 x42.
If Luke allocates $200 to spend on both goods and if a case of CDs costs $20 and a pizza costs $10, how many cases of CDs and pizzas would he consume in order to maximize his utility subject to his income. Show your work and illustrate your answer graphically.
The problem in economics in price theory deals with deriving maximum marginal utility and marginal rate of substitution.