Julio receives from consuming food (F) and clothing (C) as given by the utility
ID: 1192744 • Letter: J
Question
Julio receives from consuming food (F) and clothing (C) as given by the utility function U (F,C ) = 2FC. The marginal utility with respect to F is MUf = 2C, and the marginal utility with respect to C is MUc= 2F. In addition, the price of food is $5 per unit, the price of clothing is $20 per unit, and Julio’s weekly income is $60. A.When Julio is maximizing utility, the optimal bundle (F*,C*) should satisfy two conditions. What are these two conditions? B.According to the two conditions in part 1.c), calculate (F*,C*). List detailed steps. C. Calculate the maximum utility that Julio can obtain.
Explanation / Answer
Two conditions that needs to be fulfilled are:
1) Maximize U(F,C)
2) Budget constraint should be adhered
These conditions are summarised in,
MUf/MUc = Pc/Pf
2C/2F = 20/5
C = 4F
Pc.C +Pf.F = M
20(4F) + 5F = 60
F* = 12/17
C* = 4(12/17) = 48/17
Max utility = 2(12/17)(48/17) = 3.98
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