Question

Exercise 5: Generating an individual demand curve Suppose that a consumer is only able to purchase two goods, ham and cheese. The consumer has an income of $6000. When Pham = $100 and Pcheese = $100, the consumer demands 15 units of ham and 15 units of cheese. When Pham = $50 and Pcheese = $100, the consumer demands 24 units of ham and 18 units of cheese. 1. Plot a budget line for each of the two pricing regimes. Describe the budget constraint in words. Assuming that the consumer has a Cobb-Douglas utility function, add an indifference curve to your plot that intersects each of the two consumption bundles. (You don't need to be precise, just convey the general shape of Cobb-Douglas indifference curves.)

Answer 1

Given: when income $6000 Pham = $100, Penese = $100 DD 5 DD IS. Pham = $50 & Pcheese = $100 , Donan = 24, DD cho = 16 slope of Budget constraint is given by Pham IC, Pcheese & Miso o Ham 15 24 MM The is So in this cese Pean too Slope =-100 = 1 100 end points of budget line given by M Con x-axis) and on yaris where m= income Pn Indifference cure formed by cobb dougles is convex To origin as shown by Ic, at pt. A The slope So the the The new of budget line changes with new price = PHAM = 50 = 1 (pink budget live) - Pcheese 100 Z g od intercept of her changes but intercept of Cheese remains same. equilibrium is given by IC