With good Y on the y-axis and coffee on the x-axis, (a) Using indifference curves and...

With good Y on the y-axis and coffee on the x-axis,

(a) Using indifference curves and budget lines, illustrate three utility-maximizing equilibrium points for Maxwell whose income elasticity of demand for coffee is zero.

(b) Is good Y normal or inferior to Maxwell?

(c) Explain whether you agree or disagree with the following statement: At each of the three equilibrium points in part (a), MUx/Px = MUy/Py and the marginal utility of money (l) is constant.

Solutions

Expert Solution

(a) Income elasticity of demand for coffee is zero which says that quantity demanded of coffee does not change even if your income changes. I have mapped three budget line with three IC curves named as MC1, MC2, MC3. MC1 shows you are consuming Qc level of coffee and Qy3 level of Good Y. MC1 shows you are consuming Qc level of coffee and Qy2 level of Good Y. MC1 shows you are consuming Qc level of coffee and Qy1 level of Good Y.(b) Normal good is that good whose consumption declines as prices rises and vice versa. According to this, Good Y is a normal good whose consumption changes as income changes (changes in budget).

(c) Marginal utility of money is the utility a consumer receives from the consumption of a good when he spends one rupee on it. Thus as income rises or falls the budget line falls and on a specific budget line one IC curve shows a equilibrium point on which consumer have the maximum utility. The situation given would have true if the IC curve lie on the same budget line, but Differenct IC curve on different budget line would never give same satisfaction level. So this is false.

Rahul Sunny answered 9 months ago

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