A consumer must divide $250 between teh consumption of product X and product Y. The relevant market prices are Px= $5 and Py= $10.
a. Write the equation for the consumers budget line.
b. Illustrate the consumers oppurtuinity set in a carefully labeled diagram.
c. Show how the consumers opportuinity set changes when the price of good X increases to $10. How does this change alter the market rateof subsitution between X and Y?
Total income is given to be $250.
There are two goods, X and Y. Price of X is Px = $5, and price of Y is Py = $10.
Let Qx and Qy be quantities of X and Y respectively.
a. The general equation for a budget line is:
Px * Qx + Py * Qy <= Income
Putting in the numbers from above we get
5Qx + 10Qy <= 250
b. To determine the consumer's opportunity set we just need to plot this one a graph with good X on one axis and good Y on the other. In the accompanying graph the blue line is the case when the prices are given to be $5 and $10 for X and Y respectively.
To determine where they intersect the axes we need to solve the budget ...
The slope of this graph is assessed.