Question

Derive the demand curve for pizza using indifference curve analysis with pizza on the horizontal axis and the composite good (Y) on the vertical axis. For simplicity choose three prices for pizza, 3, 6, and 9 dollars and assume income is $54 (you can estimate/make up the quantities based on how you draw the indifference curves). (2 pts)

Answer 1

Consider the given problem here there are 2 goods these are “X=Pizza” and “Y” and the consumer having income of “$M”. So, the equation of the budget line is given by, “Px*X + Py*Y = M”.

Consider the following fig.

So, consider the fig. where “AB1” be the initial budget line with “Px=P1” where “E1” be the equilibrium where the budget line “AB1” and “U1” create the tangency condition , => the optimum consumption bundle is “X1” with price “Px=P1. Now, let’s assume that “Px” decreases to “P2 < P1”, => the budget line get flatter with the same vertical intercept “A”, => the new budget line is “AB2” with new equilibrium “E2” where the budget line “AB2” and “U2” create the tangency condition, => we can see that the consumption of “X” has increased to “X2”.

Now, let’s assume that “Px” decreases further to “P3 < P2”, => the budget line get flatter with the same vertical intercept “A”, => the new budget line is “AB3” with new equilibrium “E3” where the budget line “AB3” and “U3” create the tangency condition, => we can see that the consumption of “X” has increased to “X3”.

Now if we plot these three points, “(X1, P1), (X2, P2), (X3, P3)”, we will get the demand curve. Consider the lower fig correspond the demand for “pizza”.