Suppose John has an income of $300 and spends his income to purchase two goods (X...

Suppose John has an income of $300 and spends his income to purchase two goods (X and Y ). Price of Y is $5 and price of X is $10. Furthermore, John always consumes 2 units of Y with 1 unit of X. (a) How many units of X and Y should John consume in order to maximize his utility? (b) Suppose that the price of X goes up to $15 (income and price of Y are the same). How many units of X and Y should John consume in order to maximize his utility? (c) Plot the budget constraints and indi§erence curves for parts (a) and (b) on the same graph. Clearly label the equilibrium points as "A" for the 5 equilibrium in part (a) and "B" for the equilibrium in part (b). Discuss the results in terms of the income and substitution effects.

Solutions

Expert Solution

Answer :

Step 1.

We know that the equation of the budget line is Pxq1+Pyq2=M where M is the income, Px is the price of X, Py is the price of Y, q1 is the quantity consumed by the consumer of commodity X and Y is the quantity consumed by the consumer of commodity Y.

Step 2

Using Lagrange function

Rahul Sunny answered 1 year ago

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