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Suppose u(x,y)=min{x+y,4(x)^1/2,4(y)^1/2} , Px=1, Py=2, M=5 . Here, Px, Py and M are the price of x, price of y, and the Income.

Give an example of the optimal consumption bundle of x and y for this consumer.

I know to plot the Indifference Curve given a value of Utility,however how could I know what is the maximum utility that can be obtained in this case?

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In this case the optimal choice is $(x^*, y^*) = (3, 1)$. Here is the picture :

enter image description here

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The indifference curve is the set all optimal sets of consumption.

The indifference curve derives from the utility function, which itself is a 3 variables equation (both x and y explain u)

Mathmatically , once you have the budget constraint you need to use it with the derivative of the utility function to find the optimum *under * the specific budget constraint

Your utility function cannot be derived once, but needed to be derived thrice, and "sewed" on the mininum places

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  • $\begingroup$ Budget constraint can be obtained from the given values of Px, Py and M. The constraint would be: 1x + 2y = 5 $\endgroup$ – Kong Sep 10 '18 at 12:39
  • $\begingroup$ right... I'll edit my answer $\endgroup$ – Guy Louzon Sep 10 '18 at 12:55

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