Question

Suppose Nancy’s utility function is u(x1, x2) = x2 2 -7x1,where x1 and x2 denote two different consumption goods.

a) Is x1 a neutral good, a "good" good, or a "bad" good? Is x2 a neutral good, a "good" good or a "bad" good?

b) If the price of x1 is $1 (p1=$1), price of x2 is $2, (p2=$2), and Nancy’s income is $100 (m=$100). What is her optimal consumption bundle that maximize her utility?

c) Now, suppose Nancy changes her tastes after she sees an advertisement on TV and her new utility function becomes u(x1, x2) = 2x2+7x1.Given the prices and income in part b) (p1=$1, p2=$2, m=$100). Find out Nancy’s new optimal consumption bundle.

Answer 1

Explanation:Suppose Nancy’s utility function is u(x1, x2) = x2 2 -7x1,where x1 and x2 denote two different consumption goods.

a) Is x1 a neutral good, a "good" good, or a "bad" good? Is x2 a neutral good, a "good" good or a "bad" good?

b) If the price of x1 is $1 (p1=$1), price of x2 is $2, (p2=$2), and Nancy’s income is $100 (m=$100). What is her optimal consumption bundle that maximize her utility?