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Bilbo can consume two goods, good 1 and good 2 where X1 and X2 denote the...

Bilbo can consume two goods, good 1 and good 2 where X1 and X2 denote the quantity consumed of each good. These goods sell at prices P1 and P2, respectively. Bilbo’s preferences are represented by the following utility function: U(X1, X2) = 3x1X2. Bilbo has an income of m.

a) Derive Bilbo’s Marshallian demand functions for the two goods.

b) Given your answer in a), are the two goods normal goods? Explain why and show this mathematically.

c) Calculate Bilbo’s price elasticity for good 1. Explain also in words what the measure means.

d) Would the utility functionu(x1, x2) = −2x1x2 still represent Bilbo’s preferences? Motivate your answer!

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Answer #1

Concept of Utility Maximisation (by virtue of Lagrange's equation) has been applied. Marshallian demand for goods are the demands that are expressed in terms of prices of the goods and income.

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