Question

Suppose that Ali has consumed two goods X and Y. Details of MUx and MUy are given in the following table. Ali’s income is Rs.1000 and the price of Px is Rs.200 and the price of Py is Rs.100. Units 1 2 3 4 5 6 7 8 9 10 MUx 3000 2900 2600 2300 1900 1600 1200 800 600 200 MUy 2400 2200 2000 1600 1250 1100 800 400 0 -50 i) Explain how Ali should spend his income to maximize total utility. ii) Determine how much total utility Ali receives when he purchases the combination of X and Y that maximizes total utility? How much total utility would the Ail get if he spends all his income on X or Y?

Answer 1

(A)

unit	MUX	Mux/ PX	Muy	Muy/ PY
1	3000	15	2400	24
2	2900	14.5	2200	22
3	2600	13	2000	20
4	2300	11.5	1600	16
5	1900	9.5	1250	12.5
6	1600	8	1100	11
7	1200	6	800	8
8	800	4	400	4
9	600	3	0	0
10	200	1	-50	-0.5
	17100		11700
* price X	200
**Price Y	100
***Income	1000

(B)

Ali will spend first $ 800 on Good Y on first 4 units and rest $200 will spend on good X on 2 units.

as ali has total utility from good X and Good Y is = 2400+2200+2000+1600+3000+2900= 14100

(C) if he spends all his income on good X then total utility will be = 17100

if he spends all his income on good Y then total utility will be =11700