A consumer consumes only two goods X and Y. His money income is Rs. 24

1.	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?
Answer» (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. (

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?

Answer»

(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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