Diane spends her weekly allowance of $200 on good X an
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Diane spends her weekly allowance of $200 on good X and good Y; her utility function is given by:U = 15 XY When the pr
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Diane spends her weekly allowance of $200 on good X and good Y; her utility function is given by:U = 15 XY When the price of X is $5 and the price of Y is $10, Diane consumes 20X and 10Y. (a) Show that at Dianeâ€™s equilibrium the ratio of the marginal utility of the two goods equals their price ratio. (b) By how much would Dianeâ€™s utility change if her allowance were reduced by $1.50? (c) Solve for Dianeâ€™s optimal purchases of X and Y if the price of Y is reduced, through a price subsidy, to $5. (d) What would be the cost of this price subsidy to the government? (e) How much of a cash subsidy Diane would have to be offered instead of a price subsidy to be as happy as she was initially
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