EC202 ONLINE ACTIVITY 2

Name: Tokinteiti Tabore

Student ID: S11196634

Utility Function: 𝑢 (𝑥, 𝑦) = √𝐱𝐲 ; Px = $20; Py = $10; TE ≤ $200

Budget Constraint: 𝟐𝟎𝒙 + 𝟏𝟎𝒚 ≤ 𝟐𝟎𝟎
PART A: Optimal Consumption Bundle

ℒ = √𝑥𝑦 + λ(200 − 20x + 10y)

ℒ = √𝑥𝑦 +200λ − 20xλ − 10yλ

Step 1: Differentiate the Lagrange expression and equate to zero

𝜕ℒ 1 𝜕ℒ 1 𝜕ℒ
1 1
= 2 √𝑦 𝑥 2−1 − 20λ = 2 √𝑥 𝑦 2−1 − 10λ = 200 − 20𝑥 − 10y
𝜕𝑥 𝜕𝑦 𝜕λ
1
1 − 1 1
0 = 𝟐𝟎𝟎 − 𝟐𝟎𝒙 − 𝟏𝟎y
= 2
√𝑦 𝑥 2 − 20λ = 2 √𝑥 𝑦 −2 − 10λ
√𝒚 √𝒙
0=𝟐 − 𝟐𝟎𝛌 0=𝟐 − 𝟏𝟎𝛌
√𝒙 √𝒚

Step 2: Make ′λ′ the subject of the formula for the first two derivates.

𝑦 √𝑥
0 = 2√ 𝑥 − 20λ 0=2 − 10λ
√ √𝑦
√𝒚 √𝒙
𝛌= 𝛌=
𝟒𝟎√𝒙 𝟐𝟎√𝒚

Step 3: Equate as follows

λ= λ Continuation:
√𝑦 √𝑥
= 40𝑥
40√𝑥20√𝑦 1=
20𝑦
√𝑥 √𝑦 2𝑥
1= ÷ 1=
20√𝑦 40√𝑥 𝑦
√𝑥 40√𝑥 𝒚 = 𝟐𝐱
1= ×
20√𝑦 √𝑦
40√𝑥 √𝑥
1=
20√𝑦√𝑦
Step 4: Substitute into the third derivative, which is equated to zero in Step 1.

0 = 200 − 20𝑥 − 10y 𝑦 = 2x

0 = 200 − 20𝑥 − 10(2𝑥) 𝑦 = 2(5)
0 = 200 − 20𝑥 − 20𝑥 y = 10 units
0 = 200 − 40𝑥
40x = 200
x = 5 units

Optimal Consumption Bundle: 5 units of Good x and 10 units of Good y

PART B: Consumer Equilibrium Condition

𝜕𝑈 1 1
−1
1
−1 𝑴𝑼𝒙 √𝑦 √𝑥
MUx = = √𝑦 𝑥 2 𝜕𝑈 1 2 = ÷
𝜕𝑥 2 MUy = 𝜕𝑦
= 2
√ 𝑥 𝑦 𝑴𝑼𝒚 2√𝑥 2 √𝑦
1 𝑦 2√𝑦
√𝑦
−2 −12 =√ ×
= 2 𝑥 =
√𝑥
𝑦 2 √𝑥 √𝑥
2 2√𝑦√𝑦
√𝒚
= 𝟐 𝒙 √𝒙 =
√ = 2√𝑥√𝑥
𝟐 √𝒚 2𝑦
=
2𝑥
𝒚
=
𝒙
𝑴𝑼𝒙 𝑷𝒙
=
𝑴𝑼𝒚 𝑷𝒚
𝑦
‘Substitute the
𝑴𝑼𝒙
𝑴𝑼𝒚
equation from above’
𝑥
= 20
10
‘Substitute the prices from the question’
𝑦
=2
𝑥
10
=2
5
𝟐=𝟐