Question 1 Consider an economy with two goods t = 1,2. Whenever an individual consumes ₁ units of good 1 and ₂ units of good 2, their utility is given by u(x₁, x2) = aln x₁ + ln x2, where a > 0 is a free parameter. (i) How does the parameter a affect the marginal rate of substitution between goods 1 and 2? Explain intuitively how does the relative preference for goods 1 and 2 change as the parameter a increases.
Question 1 Consider an economy with two goods t = 1,2. Whenever an individual consumes ₁ units of good 1 and ₂ units of good 2, their utility is given by u(x₁, x2) = aln x₁ + ln x2, where a > 0 is a free parameter. (i) How does the parameter a affect the marginal rate of substitution between goods 1 and 2? Explain intuitively how does the relative preference for goods 1 and 2 change as the parameter a increases.
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.11P
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