Question

Assume a consumer spends all her income in the purchase of two goods – Good X and Good Y whose prices are Ksh. 30 and Ksh. 20 per unit respectively. The consumer's monthly income is Ksh 3,000. She is satisfied with various combinations of X and Y but prefers to spend her income not in equal proportions – that is in a ratio of 1:1 respectively to maintain the level of her satisfaction.

Required:

Using a clearly labeled diagram, show the relevant budget line and indifference curve indicating the equilibrium position of the consumer.

Answer 1

The budget line equation is:

$30X + 20Y = 3,000.$

As in equilibrium X = Y, then:

$30X + 20X = 3,000,$

X = Y = 60 units.

The equilibrium position of the consumer can be depicted as intersection of the budget line 30X + 20Y = 3,000 and the corresponding indifference curve, which is not given, in the point (60; 60).