1) A consumer has $400 to spend on goods X and Y. The market prices of these two goods are Px=$10 and Py=$40
a) What is the market rate of substitution (slope) between good X and good Y
b) Illustrate/write the consumer’s budget line (regression equation) in a carefully labeled diagram.
c) Explain how the consumer’s budget line changes if income increases to $600
d) If the price of good X increases to $20 and income is $400, how the does the budget line change?
e) Write the equation of for the consumer’s budget line (Y) after price increase.
Answer:
2)
Please note that I reworded question b, c a little bit. Consider the following questions instead.
a) Write the equation of the budget line (just the formula)
b) Illustrate the consumer’s opportunity set (budget line) in a carefully labeled equation.
c) Explain the how the consumer’s opportunity set changes when the price of good X increases to $10. In other words, how does the budget line rotate? Compare the market rate of substitution (slope) before and after price increase in good of X.
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