Discussion Problem_(12)

[duck]

A consumer has the following utlity function:
U(x,y) = x+y.
Find the demand for "x" and "y" given Price of x = p1 ; price of y = p2 and imcome = M.

[Sumit]

From the utility function U(x,y) = x+y we can easily infer that for the consumer both the goods are perfect substitutes.
Thus, If P1<P2 then consumer will only consume X, n X=M/p1.
& If P1>P2 then consumer will only consume Y, & Y=M/p2.
and If P1=p2 then consumer will consume X belongs to interval [0,M/p1].(i.e any value in these interval) & Y=M/p1-X.

[Mauli]

(x,y) (p1,p2,m)=
                        (m/p1 , 0 ) if p1<p2
                         (0, m/p2) if p1>p2
                      x'p1+y'p2 =m if p1=p2..(ie anywhere on the budget line.)

[duck]

Correct Answers Sumit & Mauli.. :)