In Problem 1, Charlie has a utility function U(x_A, x_B) = x_Ax_B, the price of apples is $1, and the price of bananas is $2. If Charlie's income were $400, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint? A) 100 B) 20 C) 200 D) 50 E) 300

Question

Quizplus · Accepted Answer

Charlie's utility function is U(x_A, x_B) = x_A * x_B. To maximize utility, he should spend his income such that the marginal rate of substitution (MRS) equals the price ratio. The MRS is x_B/x_A, and the price ratio is 1/2. Solving x_B/x_A = 1/2 with the budget constraint 1*x_A + 2*x_B = 400, we find x_B = 100.

In Problem 1, Charlie Has a Utility Function U(xA, XB)

In Problem 1, Charlie Has a Utility Function U(x_A, X_B)