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?

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Definitions:

Adjusting Entry

Journal entries made in accounting records at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.

Prepaid Expenses

Expenses paid in advance for goods or services to be received in the future.

Depreciation Expense

The allocated cost of an asset over its useful life, representing wear and tear, decay, or decline in value.

Note Receivable

A financial asset representing a written promise to receive a certain amount of money at a future date.