part 3 4 5 Suppose Joan has a fixed income of 1000 and spends the entire income on commodity X and Y. The prices of commodity X and Y are 5 and 10 respectively. (i) Derive the consumer’s budget equation and sketch the line of this equation plotting Y on the vertical axis and X on the horizontal axis. (ii) What is the slope of the budget line (i) and what does it mean? (iii) Assuming income and price of X remain the same, show the effect of a 50 percent reduction in the price of Y on the consumer’s budget line. (iv) Show the effect of a 100 percent increase in income and a 50 percent reduction in prices on the consumer’s budget line. (v) If Joan’s U = X2Y2 find the optimal bundle of X and Y that maximises Joan’s utility.
part 3 4 5
Suppose Joan has a fixed income of 1000 and spends the entire income on commodity X and Y. The prices of commodity X and Y are 5 and 10 respectively.
(i) Derive the consumer’s budget equation and sketch the line of this equation plotting Y on the vertical axis and X on the horizontal axis.
(ii) What is the slope of the budget line (i) and what does it mean?
(iii) Assuming income and price of X remain the same, show the effect of a 50 percent reduction in the price of Y on the consumer’s budget line.
(iv) Show the effect of a 100 percent increase in income and a 50 percent reduction in prices on the consumer’s budget line.
(v) If Joan’s U = X2Y2
find the optimal bundle of X and Y that maximises Joan’s utility.
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