Ross derives utility from only two goods, chocolates (x) and donuts (y). His utility function is as follows: U(x,y) = 2xy. His marginal utility from chocolates (x) and donuts (y) are given as follows: MUx = 2y and MUy = 2x.
Ross has an income of $100 and the price of chocolates (Px) and donuts (Py) are both $0.50.
a. What quantities of x and y will maximize Ross’s utility? Show your work. How much total utility can be achieved by consuming these quantities? b. Suppose price of donuts (Py) increase to $1.00, price
of chocolates and income remain unchanged. How much is the total effect
of this price change on Ross’s consumption of donuts? Show your work.
How much of this total effect is due to income effect and how much is
due to substitution effect? Show your work.
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