A consumer consumes only two goods X and Y. His money income is Rs. 24 and the prices of Goods X and Y are Rs. 4 and Rs. 2 respectively. Answer the following questions:
(ii) Write down the equation of the budget line?
iii) What is the slope of the budget line?
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(i) No, the consumer cannot afford a bundle of 4X and 5Y.
Given, money income =Rs.24;PX=Rs.4 and PY=Rs.2, if he purchases 4X and 5Y, then
4×4+5×2=26>24
Therefore, he is not able to buy a bundle of 4X and 5Y.
(ii) When the consumer is in equilibrium : MRSXY=PYPX
The price ratio indicates that for every additional unit of Good−X, the consumer has to sacrifice 2 units of Good−Y. So that price ratio is 2:1. Accordingly, in a state of equilibrium, the marginal rate of substitution between Good−X and Good−Y must be equal to 2:1.
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