4. John has income $24 dollars that can be used to buy 6 units of good X Or 8 un

Question

4. John has income $24 dollars that can be used to buy 6 units of good X Or 8 units Of good Y. His budget line and optimal consumption (i.e., utility maximization) point A are shown in Figure. 4. a) How large is the marginal rate of substitution (MRS) at point A? b) Why doesn't John choose his consumption at point B? (Make an argument by comparing the MRS and the price ratio at point B.) c) Can you find out how many units of good Y he buys at point A? d) If there is a 50% discount on the price of good X, other things remain the same, please answer the following: (i) Please draw the new budget line and indicate the probable new consumption point. (ii) Is this consumer better off? Why? (Instruction: Please reproduce Fig. 4 for answering part d)

Explanation / Answer

a. a point A marginal rate of substitution = 1

b. John do chose his consumption on point B because point B lies on the lower indifference curve than A. on this lower indifference curve John will get lower utility.

c. at point A he can purchase 4 unit of good Y.

d. if 50% discount is given on X then he can purchase 12 unit of X in his budget. his budget line will have a new point on X axis and it will have same point (i.e. 8 on ) y axis as price of y is same.

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