Question

Draw a graph with m on the y-axis and X on the x-axis demonstrating how a person optimizes given the budget constraint. Draw the budget constraint, the indifference curve tangent to it, the point of tangency, and label the optimal choices of X as X1 and m as m1.

Answer 1

The question relates to creating a graph that illustrates a consumer's optimal choices between two goods, 'candy' and 'movies', given the constraints of their budget. It involves plotting a budget constraint and an indifference curve that touches the budget constraint at the point of tangency, representing the optimal consumption bundle, marked as X1 for movies and m1 for candy.

Step-by-step explanation:

The question asks us to graphically represent how a person optimizes their consumption bundle given a budget constraint in a scenario where they have to choose between two goods, in this case, 'candy' and 'movies'. The first step is to draw a budget constraint line, which shows all possible combinations of the two goods that the consumer can afford. Then, we identify point A on this line, which will be the optimal consumption point, where the consumer's indifference curve is tangent to the budget constraint. At this point, the slope of the indifference curve (representing the marginal rate of substitution) is equal to the slope of the budget constraint (representing the price ratio of the two goods).

An indifference curve represents all combinations of the two goods that provide the same level of utility to the consumer. To maximize utility, the consumer will choose the highest possible indifference curve that is still within their budget, which is where it is tangent to the budget constraint. In the graph, the optimal choices of X and m are labeled as X1 and m1, respectively, indicating the quantity of 'movies' (X) and 'candy' (m) that the consumer decides upon at the optimal point A.

Answer 2

An indifference curve is a graph that shows different combinations of two goods that give the same level of satisfaction to an individual. The budget constraint represents the different combinations of goods that can be purchased given a fixed budget. The point of tangency between the indifference curve and the budget constraint represents the optimal choice of goods given the budget constraint.

Step-by-step explanation:

An indifference curve is a graph that shows different combinations of two goods that give the same level of satisfaction to an individual. The y-axis represents the quantity of the good on the vertical axis (m) and the x-axis represents the quantity of the good on the horizontal axis (X). The budget constraint represents the different combinations of goods that can be purchased given a fixed budget. It is represented by a straight line on the graph.

The indifference curve is drawn to show the combinations of goods that provide the same level of utility to the individual. It is a downward sloping curve because as the quantity of one good increases, the quantity of the other good must decrease to maintain the same level of utility. The point of tangency between the indifference curve and the budget constraint represents the optimal choice of goods given the budget constraint. The optimal choices of X and m are labeled as X1 and m1.