a) Consumers' opportunity set show the various combination of two good that are available given the amount of income and prices? Do you agree or disagree. Discuss
b) Suppose all prices doubled and at the same time consumers' income also doubled, will this alter the consumer's opportunity set. If yes, explain. If no, explain
a) This statement is true for a two-good model. In this case the opportunity set shows all possible consumption bundles of the two goods that someone can afford given the prices of the two goods and the person's income level. It is constraint by the budget line as follows;
P1X1 + P2X2 ≤ consumer's income
However, this relationship ...
Consumers' opportunity set shows all possible consumption bundles of n goods that someone can afford given the prices of the n goods and the person's income level. It is constraint by the budget equation as follows:
P1X1 + P2X2 + P3X3 + ...................... + PnXn ≤ consumer's income. Consumers can consume at the maximum level on his or her budget line. However, he or she can consume anywhere below the budget constraint. In this case he or she doesn't exhaust his or her income.