ECON 1011 Lecture Notes - Lecture 14: Budget Constraint
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We know that due to the allocation of all money, pxx + pyy = m. In this case, 2x + 3y = 20. In this case, for #1, x provides more utility, therefore one would choose x over y if only 1 is chosen. The opposite is true for 3, 4, 5 & 6. For mux or muy, take the difference between the current utility and the previous one. Eg. for # of y = 1, 20 0 = 20. This shows the utility gained per dollar invested. For rule 1: y = 3 & x = 3, y = 4 & x = 4, y = 5 & x = 5, y = 6 & x = 6 (cid:3025)(cid:3025) =(cid:3026)(cid:3026) (cid:3025)(cid:1850)+(cid:3026)(cid:1851)= (cid:885)(cid:1851)+(cid:884)(cid:1850)=(cid:884)0. These are candidates because their marginal utility per dollar is equal, fulfilling the first equation/rule. By plugging in x & y for each candidate, only y = 4 & x = 4 fulfils rule 2.
