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Practical problems in price theory
Course:- Microeconomics
Reference No.:- EM1372




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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.

Summary:

The problem in economics in price theory deals with deriving maximum marginal utility and marginal rate of substitution.




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