1. X1 and x2. The price of x, is $80 per unit and the price of x2 is $40 per unit; x1 and x2 are normal goods. Suppose a consumer has a fixed budget of $400. She spends it all on two goods, (a) Draw and label the consumer's budget constraint, with x1 on the horizontal axis and x2 on the vertical axis. (b) What is the value of the consumer's marginal rate of substitution at her optimal consumption bundle? (e) Suppose the price of x2 increases to $50 per unit. Show the effect of this nrice change on the consumer's budget constraint drawn in part (a).
1. X1 and x2. The price of x, is $80 per unit and the price of x2 is $40 per unit; x1 and x2 are normal goods. Suppose a consumer has a fixed budget of $400. She spends it all on two goods, (a) Draw and label the consumer's budget constraint, with x1 on the horizontal axis and x2 on the vertical axis. (b) What is the value of the consumer's marginal rate of substitution at her optimal consumption bundle? (e) Suppose the price of x2 increases to $50 per unit. Show the effect of this nrice change on the consumer's budget constraint drawn in part (a).
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 1PA
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Suppose a consumer has a fixed budget of $400. She spends it all on two goods,
X1 and x2. The price of x1 is $80 per unit and the price of x2 is $40 per unit; x1 and x2 are
normal goods.
(a) Draw and label the consumer's budget constraint, with x, on the horizontal axis and x2 on
the vertical axis.
(b) What is the value of the consumer's marginal rate of substitution at her optimal
consumption bundle?
(e) Suppose the price of x2 increases to $50 per unit. Show the effect of this nrice change on
the consumer's budget constraint drawn in part (a).
(d) Explain the impact of the substitution effect and the income effect of the price change in
part (c) on the consumption of goods x1 and x2. (For full credit, explain both the separate
and combined impacts of substitution and income effects on x1 and x2).
(e) Suppose that the price of x1 increases to $100 per unit. Show the effect of this price change
on the consumer's budget constraint drawn in part(a).
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