Answer to Question #190935 in Macroeconomics for Ezra

Question

Assume that a consumer spends all his income in the purchase of two commodities X and Y whose prices are Ksh.30 and Ksh.20 per unit respectively. The consumer’s monthly income is Ksh.12000. He is satisfied with various combinations of X and Y but prefers to spend his income in equal proportions on the commodities, that is, at a ratio of 1:1 to maintain his level of satisfaction.

Required:

(i) Show the relevant budget line and indifference curves indicating the equilibrium position of the consumer. [5 marks]

(ii) What is the effect of an increase in the consumer’s income from Ksh.12000

 to Ksh.24000 per month

(b) Explain practical applications of indifference curve analysis?

(c) Discuss formal similarities between producer and consumer theories.

Answer 1

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