Sally Consumes Two Goods, X and Y

question 54

Essay

Sally consumes two goods, X and Y. Her utility function is given by the expression The current market price for X is $10, while the market price for Y is $5. Sally's current income is $500.
a. Sketch a set of two indifference curves for Sally in her consumption of X and Y.
b. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope.
c. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint. Show her optimum point on a graph. (Partial units for the quantities are possible.) d. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What would happen to her utility as a result of the price increase?

---

Definitions:

Net Operating Income

An entity’s income after all operating expenses have been deducted from total revenue, excluding taxes and interest charges.

Variable Costing

A costing method in which fixed manufacturing overhead is not assigned to the product, but rather treated as an expense of the period.

Absorption Costing

is an accounting method that includes all manufacturing costs—direct materials, direct labor, and both variable and fixed manufacturing overhead—in the cost of a product.

Unit Product Cost

The total cost incurred to produce, manufacture, or acquire a product, divided by the total number of units produced.