Question

Assume the prices of product X and Y are $2.00 and $1.00, respectively, and that Mr. Mo has $100 to spend. Assume a normal indifference curve.

a. What is the slope of Mr. Mo budget constraint.
b. Write out Mr.Mo equation to his budget constraint.
c. Assume that Mr. Mo needs 10 units of product X to maximize utility. What combination of X and Y Will Mr. Chen purchase?
d. Now assume that the price of Y changed from $1.00 to $2.00, redo part a, b and c,
e. Draw the budget constraint graph and indifference curve before the change and after the change in the price of Y.

Answer 1

Step-by-step explanation:

The equation of a line is given by:

y = mx + b; where m is the slope of the line, b is the y intercept.

Given that the price of product X is $2 while the price of Y is $1 and Mr. Mo has $100 to spend. Therefore:

a) 2x + y = 100

y = -2x + 100

The slope of Mr. Mo budget constraint is -2

b) 2x + y = 100

c) If x = 10, to find the combination, substitute x = 10 and find y:

2x + y = 100

2(10) + y = 100

y + 20 = 100

y = 80

That is 10 units of x and 80 units of Y

d) 2x + 2y = 100

2y = -2x + 100

y = -x + 50

The slope of Mr. Mo budget constraint is -1

The budget constraint is 2x + 2y = 100

If x = 10, to find the combination, substitute x = 10 and find y:

2x + 2y = 100

2(10) + 2y = 100

2y + 20 = 100

2y = 80

y = 40

That is 10 units of x and 40 units of Y

e) The graph was drawn using geogebra online graphing calculator and it is attached