2. A consumer has and income of £40 to spend in two commodities. Commodity 1 costs £10 per unit, and commodity 2 costs £5 per unit. (i) What is the consumer's budget equation? If the consumer spends on his/her money on commodity 1, how much could he/she buy? Suppose the consumer was initially consuming 2 units of commodity 1 and 4 units of commodity 2. If the price of commodity 1 increases to £20 and the price of commodity 2 remains £5, by how much would the consumer's income have to rise so that he can still afford the initial bundle? (ii) Now suppose this consumer is a rational consumer and would like to maximize his/her utility. Explain how an increase in income will affect the consumer's optimal consumption bundle?

2. A consumer has and income of £40 to spend in two commodities. Commodity 1 costs £10 per unit, and commodity 2 costs £5 per unit. (i) What is the consumer's budget equation? If the consumer spends on his/her money on commodity 1, how much could he/she buy? Suppose the consumer was initially consuming 2 units of commodity 1 and 4 units of commodity 2. If the price of commodity 1 increases to £20 and the price of commodity 2 remains £5, by how much would the consumer's income have to rise so that he can still afford the initial bundle? (ii) Now suppose this consumer is a rational consumer and would like to maximize his/her utility. Explain how an increase in income will affect the consumer's optimal consumption bundle?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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