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Budget Set, Normal and Inferior Goods

Managerial Economics and Business Strategy by Baye.
Chapter 4 #6, 9 solution answer

6) In the following figure, a consumer is initially in equilibrium at point C. The consumer's income is $400, and the budget line through point C is given by $400 = $100X + $200Y. When the consumer is given a $100 gift certificate that is good only at store X, she moves to a new equilibrium at point D. (pdf file of figure is attached).

a. Determine the prices of goods X and Y.
b. How many units of product Y could be purchased at point A?
c. How many units of product X could be purchased at point E?
d. How many units of product X could be purchased at point B?
e. How many units of product X could be purchased at point F?
f. Based on this consumer's preferences, rank bundles A, B, C, and D in order from most preferred to least preferred.
g. Is product X a normal or an inferior good?

9) A consumer's budget set for two goods (X and Y) is 600 ≥ 3X + 6Y.
a. Illustrate the budget set in a diagram.
b. Does the budget set change if the prices of both goods double and the consumer's income also doubles? Explain.
c. Given the equation for the budget set, can you determine the prices of the two goods? The consumer's income? Explain.

Attachments

Solution Preview

Please refer to the 3 pdf files attached for the complete solutions. Only the text portions of the files have been provided here.

6a) In the following formula, is the price of X and is the price of Y.

Compare the formula with the budget line to determine the prices of X and Y. The price of good X is $100 and the price of good Y is $200.

b) The number of units of product Y that could be purchased at point A can be found using . Substitute $400 for M and $200 for

2 units of product Y could be purchased at point A.

c) The number of units of product X that could be purchased at point E can be found ...

Solution Summary

This solution includes detailed explanations and step-by-step calculations for the 2 problems in 3 pdf files. The solution to #6 includes over 450 words. The solution to #9 includes over 150 words, and a figure.

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