Question

Consider the utility function u (x) = log (x), let px = 2 and = 5. Derive the consumer equilibrium and check the second order condition.

Answer 1

The budget line of the consumer.

The consumer is a rational human being.

He tries to maximise the level of utility by spending all his money income on the two goods, X and Y. He would be in equilibrium only when he has been able to maximise utility subject to his budget constraint.