Answer to Question #105830 in Microeconomics for karisma

Question

A consumer splits their income equally between two goods. If the price of one good increases by 10% and their income increases by 5%, show that the consumer’s optimal consumption bundle will change despite them being able to afford their original bundle. With using diagram.

Answer 1

If a consumer splits their income equally between two goods and the price of one good increases by 10% and their income increases by 5%, then the consumer’s optimal consumption bundle will change, because as the budget line will shift, so the customer now can afford another indifference curve. The reason is, that as the price of one good increases by 10%, then he will buy less of this good, and as the second good is now comparatively cheaper and the income will increase, so the customer will buy more of this good. That's why the consumer’s optimal consumption bundle will change, even if it is possible to buy the same combination of goods.