Explore BrainMass
Share

Microeconomics: Utility Maximization

I need help with the problem below. Please explain in detail. Thank you.

Suppose Bob spends his income (I) solely on goods X and Y. Initially, Bob has $1000/week to spend on consumption and the prices of these goods are Px=$4 and Py=$2. Graph the budget constraint for this problem. Given these prices and income, Bob maximizes utility buy consuming X1 and Y1. On the same graph, indicate this utility maximizing bundle. Suppose that the price of Y fall to $1/unit. Illustrate how this changes Bob's budget constraint. Suppose that after the price change, consumption of Y has increased to Y2 but the consumption of X stays the same at X1.

Graphically illustrate the income and substitution effects for both Y and X generated by the price change.

© BrainMass Inc. brainmass.com August 20, 2018, 1:28 am ad1c9bdddf

Solution Summary

This solution provides a detailed, step-by-step explanation of the given economics problem.

$2.19