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?
Chapter6: Consumer Choice And Demand
Section: Chapter Questions
Problem 1.3P
Related questions
Question
![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?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1c33a0e6-2cc1-47f7-8767-69df24a18031%2F94efc63c-a57b-43a4-be8e-a2efe4d59b06%2Frna3cvc_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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?
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