Rakhi likes to consume only two commodities X and Y, and nothing else. Both the commodities give her positive utilities, thereby giving rise to her preferences being well- behaved and convex. However, she treats commodity X as an inferior good. Suppose Rakhi earns an income of 1000 per month and the ongoing prices of commodities X and Y are 20 and 10, respectively. (a) Show, with the help of a diagram, what will happen to her optimal consumption of commodity X, in each of the following circumstances: Situation A: Price of X falls to 10, while everything else remains the same. Situation B: Her income increases to 2000, while prices remain the same. (b) What can you say about the demand curve for commodity X that Rakhi’s choice behaviour would produce? Elaborate, with the help of diagram
Rakhi likes to consume only two commodities X and Y, and nothing else. Both the
commodities give her positive utilities, thereby giving rise to her preferences being well-
behaved and convex. However, she treats commodity X as an inferior good. Suppose
Rakhi earns an income of 1000 per month and the ongoing prices of commodities X and
Y are 20 and 10, respectively.
(a) Show, with the help of a diagram, what will happen to her optimal consumption of
commodity X, in each of the following circumstances:
Situation A:
Situation B: Her income increases to 2000, while prices remain the same.
(b) What can you say about the demand curve for commodity X that Rakhi’s choice
behaviour would produce? Elaborate, with the help of diagram.
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