Question 13. Consider a utility function, which represents my preferences for tw

Question

Question 13. Consider a utility function, which represents my preferences for two goods. Using the graph below, discuss the indifference curves shown. Specifically, how are the goods related? Suppose I am currently consuming at point A. Explain what happens to my utility if I increase my consumption of one good, while holding the other constant. Question 14. Suppose that I consume only two goods, x and y. Would it be possible for an increase in the price of good x to cause an increase in counsmption of good x? Explain

Explanation / Answer

Q13) This graph represents goods that are complements of each other. This means that maximum utility is obtained when the two goods are consumed in a particular combination like 2 cubes of sugar with one cup of tea. Here an additional cup of tea without any sugar provides no additional utility just like 3 sugars and one cup of tea doesn't provide any additional utility. Say the x-axis had cups of tea and y-axis had cubes of sugar. Point A would represent the perfect combination of 1 cup of tea to 2 cubes of sugar. Moving along the right on the x-axis provided no extra utility. Similarly moving along the y axis upward also provides no additional utility as more cubes of sugar are provided.

The above function U(x,y) = min (x,y)

q14)

An increase in the price of good x will result in an increase in consumption of good y when goods x and y are substitutes. When x's price increases, the demand for y increases as it becomes the cheaper alternative.

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