ISI 2004

[Manvendra]

Hi,

In the question :

A consumer has Rs. 25 to spend on two goods x and y. The price
of good x is Rs. 3 and that of good y is Rs. 4. The continuously
differentiable utility function of the consumer is U (x, y) = 12x + 16y –x2
– y2 where x ≥ 0 and y ≥ 0


Can we treat it as a case of Perfect Substitutes ?


Thanks in advance..

[anon_econ]

It's x^2 and y^2 na? ICs would be circles.

[Manvendra]

yup..its x^2 , y ^2 ..

so , what can we say about the nature of the goods.

[anon_econ]

i think 6,8 is the bliss point. around it u hv circles n utility decreases as u move further away from 6,8.

[ritu]

so vasudha can we say that beyond rs 50 ,even if his money income increases he wud not move away from 6,8....???????coz at m=50, x=6 nd y=8....his m optimum....rationally he wud not use any income >50....????

[aditi5000]

MU from both goods starts declining after x=6 and y=8 ie DMU sets in. Thus, Rs 50 (6*3+ 4*8) is the optimal income level. If income increases beyond this, consumption of x and y will not increase

[anon_econ]

ritu, i agree with u n aditi :)
but in this question do we hv 2 calculate the optimum bundle when income is 25 or not?

[aditi5000]

yep i think we should show it in the answer, no harm - because the question asks "what happens to the optimum commodity bundle"