Nitin consumes 2 burgers and 2 cokes every day when his income per month is
Rs. 10,000 and the prices of burger and coke are Rs. 10/burger and Rs. 6/ coke.
The prices of burger and coke increase to Rs. 20 and Rs. 12 respectively. His
employer increases his salary to Rs. 20,000. Show the impact of the following
changes on his budget set and his consumption using indifference curves.
Answers
Explanation:
it will remain unchanged
Answer:
The impact of changes in prices and income on a consumer's budget set and consumption can be analyzed using indifference curves, which represent the various combinations of products that provide the same level of satisfaction to the consumer. The slope of the budget line and the shape of the indifference curves determine the optimal consumption bundle for the consumer
Explanation:
The budget set of Nitin represents the combination of burgers and cokes that he can purchase with his income. When the prices of burgers and cokes are Rs. 10/burger and Rs. 6/coke respectively, Nitin's budget set is represented by the line 2B + 2C = 10,000.
Here, B represents the number of burgers he buys, and C represents the number of cokes he buys.
With the increase in the prices of burgers and cokes to Rs. 20 and Rs. 12 respectively, Nitin's budget set will shift inward, and his new budget set will be represented by the line 2B + 2C = 20,000.
The increase in his income to Rs. 20,000 will enable him to still buy the same combination of burgers and cokes as before, i.e.,
2B + 2C = 10,000,
but he will now have additional income that he can use to buy more of each product.
Using indifference curves, we can see that the impact of these changes on Nitin's consumption will depend on his preferences. If Nitin has a strong preference for burgers over cokes, then he may choose to buy more burgers and fewer cokes, even if the prices of both products have increased. On the other hand, if Nitin has a strong preference for cokes over burgers, then he may choose to buy more cokes and fewer burgers.
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