mework+2+TR+class.pdf 2. Use the following graph showing a consumer\'s budget li
ID: 1142091 • Letter: M
Question
mework+2+TR+class.pdf 2. Use the following graph showing a consumer's budget line and some indifference curves to answer the following questions (a through e). You must show work. The consumer's income is $600. 40 30 20 10 10 20 30 4050 Quantity of X a) Given the information provided: What is the price of Good X? What is the price of Good Y? How did you find your answers? b) If the consumer is making an optimal choice, approximately how many units of Good X should he or she consume and how many units of Good Y should he or she consume? Why? How did you get this number? c) At the optimal consumption bundle, what is the Marginal Rate of Substitution? Explain how you found this answer. Interpret the meaning of the Marginal Rate of Substitution at this bundle. d) Suppose that the consumer is currently at bundle A. Explain why bundle A is not the optimal choice for the consumer Under what circumstances would the consumer be able to reach indifference curve I11? Explain your answer e)Explanation / Answer
Answer 2
a) Budget Constaint is given by
x*px + y*py = M where , M denoted Income px denotes price of Good X and py denoted price of Good Y and here M = 600
We can see from above budget line (Downward Sloping Straight Line) that when y = 0, x = 40. Hence putting these values in Budget constaint we get:
40px + 0 = 600 => Price of good X = 600/40 = $15
We can see from above budget line (Downward Sloping Straight Line) that when x = 0, y = 30. Hence putting these values in Budget constaint we get:
30py + 0 = 600 => Price of good Y = 600/30 = $20
b) According to utility maximizing condition a consumer purchase that Bundle at which indifference Curve is tangent to budget line Because with the given budget A consumer recieves maximum satisfaction when it touches Highest IC curve. We can see from the above graph Budget Line is tagent to IC (II). Hence Optimal quantity is 20 unit of X and 15 Unit of Y.
c) Consumer Optimization Rule : In order to maximize its utility with given prices and Income a consumer should consume that quantity at which MRS = slope of budget line. Hence
MRS = Slope of Budget Line = -px/py = -15/20 = (-)0.75
Hence it is interpretad as:
In order to order to consume 1 more unit of Good X. A consumer will sacrifice 0.75 unit of good Y
d) Bundle A is not Optimal choice because It can achive higher utility with given price and Income. Suppose He consumes A then His utility will be depicted frim IC (I) and He can consume Bundle which lies on IC(II). Hence as IC(II) is above IC(I) , A point on IC(II) is more preferable to points on IC(I). Hence Point A is not optimal because consumer is not maximizing his utility with the given Income and Prices of goods.
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