Practical problems in Price Theory
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Problem 1:
Luke likes to consumer CDs (good1) and pizzas (good 2). His preference over both goods is given by the utility function
U(x1; x2) = x21x42.
If Luke allocates $200 to spend on both goods and if a case of CDs costs $20 and a pizzacosts $10, how many cases of CDs and pizzas would he consume in order to maximize his utility subject to his income. Show your work and illustrate your answer graphically.
Summary:
The problem in economics in price theory deals with deriving maximum marginal utility and marginal rate of substitution.
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