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A consumer must divide $600 between the consumption of product X and product Y. The relevant...

A consumer must divide $600 between the consumption of product X and product Y.

The relevant market prices are Px = $10 and Py = $40. (LO2)

a. Write the equation for the consumer’s budget line.

b. Illustrate the consumer’s opportunity set in a carefully labeled diagram.

c. Show how the consumer’s opportunity set changes when the price of good X

increases to $20. How does this change alter the market rate of substitution between

goods X and Y?

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Answer #1

a. Budget is given as:

Market rate of substitution:

b.

Feasible set: Green area below red budget line.

c. When price of good X increases to 20, budget becomes:

Feasible set: All Green area below red budget line.

Market rate of substituion:

Rate changes from 1/4 to 1/2. It doubles.

If you are satisfied with the answer, please provide a positive rating. Feel free to comment in case of queries.

Have a nice day ahead!

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