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Demand curve for peanuts

Question:

a) Johnny consumes peanuts (x1) and a composite good (x2). His utility function is U = x1x2. His marginal utilities are MU1 = x2 and MU2 = x1. Johnny's budget is $20 and the price of the composite good is $1. Derive Johnny's demand function for peanuts.

b) Ambrose consumes peanuts (x1) and a composite good (x2).He has a utility functionU = 4 x1 + x2. This means his MU1 = 2/√x1 and his MU2 = 1 . The price of the composite good is p2 = 1. His budget is $20 per month. Derive Ambrose's demand function for peanuts. How does it compare with Johnny's demand curve for peanuts?

Solution:

a) U = x1x2

MRS = MU1/MU2 = x2/x1

Now, MRS = P1/P2 = P/1 = x2/x1 => x2 = 2Px1 {taking P1 = P}

Putting this value in budget equation:

Px1 + x2 = 20

  1.   Px1 + 2Px1 = 30
  2.   Px1 = 10
  3.   x1 = 10/P
  4.   x2 = 20

b) U = 4 Öx1 + x2.

MRS = MU1/ MU2 = (2/Öx1)/1 = 2/Öx1

Now, MRS = P1/P2 = P/1 = 2/Öx1

  1.   Öx1=2/P
  2.   x1 = 4/P2

Therefore, Ambrose's demand for peanuts does not depend upon his income, while Johnny's demand for peanuts does depend upon his income.

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