GROUP ASSIGNMENT

PRESENTATION 5
 Table of contents

01 Yên Đan 03 Xuân Lam 05 Thu Thảo

02 Ngọc Minh 04 Uy Lực

 PROBLEM 1
Suppose that a consumer who uses $60 to buy 2 goods: X and Y.

Given that price of the good X is $3 per unit and price of the good
Y is $1 per unit.

Suppose that the utility function of this consumer is TU=XY

1. Identify the budget line equation for this consumer

From the hypothesis: "A consumer who uses $60 to buy 2 goods: X and Y.
Given that price of the good X is $3 per unit and price of the good Y is $1
per unit", we have the budget line equation for this customer:
3X+Y=60 ⟺ Y=60-3X
 2. Identify MUx, MUy and MRSxy

𝛥𝑇𝑈 𝑑𝑈
Based on Marginal Utility Formula, we have: 𝑀𝑈 = 𝛥𝑄
= 𝑑𝑄 = (𝑇𝑈)′𝑄

Because the utility function is 𝑇𝑈 = 𝑋𝑌, the marginal utility of X is: 𝑀𝑈𝑥 = 𝑌
and the marginal utility of Y is 𝑀𝑈𝑦 = 𝑋
Based on the law of diminishing marginal utility, the marginal rate of substitution
of X for Y is
𝑀𝑈𝑥 𝑌
𝑀𝑅𝑆𝑥 = =
𝑀𝑈𝑦 𝑋
 3. What are optimal quantity of good X (X∗) and optimal
quantity of good Y (Y∗) that he should buy to maximize his
utility.
Consumer will obtain maximum utility when they consume the quantity of
good X and Y at the equilibrium point where is at the tangency between
indifference curve and the budget line
𝑃𝑥
𝑀𝑅𝑆𝑥𝑦 =
𝑃𝑦
𝑀𝑈𝑥 𝑃𝑥 𝑌 3 1
⇔ = ⇔ = ⇔𝑋= 𝑌
𝑀𝑈𝑦 𝑃𝑦 𝑋 1 3
1
Substituting 𝑋 = 3 𝑌 into the budget line. Thus:
𝑌 = 60 − 3𝑋 = 60 − 2𝑌
⇔ 𝑌 = 30, 𝑋 = 10
 PROBLEM 2
Monthly, Ms. Lan spends 1 million VND for buying meat (X) and
potato (Y). Price of meat is 20,000 dong/kg and price of potato is
5000 dong/kg.
a. Identify Lan’s budget line equation and draw that BL curve.

Lan's budget line equation:

20000x + 5000y = 1000000
Or:
y = 200 - 4x
 b. Assume that Lan’s utility function for meat and potato is
TU= (X-2).Y, what is Lan’s optimal choice between meat and
potato to maximize her total utility?
Lan will obtain maximum utility when she consumes
the quantity of good X and Y at the equilibrium point
where is at the tangency between indifference curve
and the budget line
𝑃𝑥
𝑀𝑅𝑆𝑥𝑦 =
𝑃𝑦
𝑀𝑈𝑥 𝑃𝑥 𝑀𝑈𝑥
Because,𝑀𝑅𝑆𝑥 = ⇒ 𝑀𝑅𝑆𝑥𝑦 = = (*)
𝑀𝑈𝑦 𝑃𝑦 𝑀𝑈𝑦

The utility function is 𝑇𝑈 = (𝑋 − 2)𝑌, so the marginal

utility of X is: 𝑀𝑈𝑥 = 𝑌 and the marginal utility of Y is Substituting 𝑌 = 4𝑋 − 8 into the budget
𝑀𝑈𝑦 = 𝑋 − 2 line. Thus:
Substituting 𝑀𝑈𝑥 and 𝑀𝑈𝑦 into (*) equation, we have: 𝑌 = 200 − 4𝑋
𝑃𝑥 𝑀𝑈𝑥 𝑌 4𝑋 − 8 = 200 − 4𝑋
𝑀𝑅𝑆𝑥𝑦 = = ⇔4= 𝑋 = 26, 𝑌 = 96
𝑃𝑦 𝑀𝑈𝑦 𝑋−2
𝑌 = 4𝑋 − 8
Thanks