Draw a budget constraint for an individual where if all income is dedicated to consumption of good X, the consumer can consume 40 units, and similarly, if the consumer dedicates all income to good Y 40 units can be consumed. What is the slope of the budget constraint? Draw in an indifference curve for this consumer showing an initial consumer equilibrium, with consumption of X and Y labelled. Now suppose that the price of good X falls such that 80 units of X could be purchased if the consumer dedicates all income to good X. What is the price ratio and slope of the new budget constraint?
Draw a budget constraint for an individual where if all income is dedicated to consumption of good X, the consumer can consume 40 units, and similarly, if the consumer dedicates all income to good Y 40 units can be consumed. What is the slope of the budget constraint? Draw in an indifference curve for this consumer showing an initial consumer equilibrium, with consumption of X and Y labelled. Now suppose that the price of good X falls such that 80 units of X could be purchased if the consumer dedicates all income to good X. What is the price ratio and slope of the new budget constraint?
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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Draw a budget constraint for an individual where if all income is dedicated to consumption of good X, the consumer can consume 40 units, and similarly, if the consumer dedicates all income to good Y 40 units can be consumed. What is the slope of the budget constraint? Draw in an indifference curve for this consumer showing an initial consumer equilibrium, with consumption of X and Y labelled. Now suppose that the price of good X falls such that 80 units of X could be purchased if the consumer dedicates all income to good X. What is the price ratio and slope of the new budget constraint? Draw in a new indifference curve tangent to the new budget constraint, together with consumption of X and Y. Identify the income and substitution effects graphically.
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