Question

1. There are two types of perfect substitutes. The price of the 1st one is 30, the price of the other one is 60. The income is 1200. Which is the optimal consumer’s bundle?

2. The utility curve of Peter is U=x+y. What kind of goods are these? Please try to draw the indifference curves and describe the characteristics.

Answer 1

If the price of the 1st one is 30, the price of the other one is 60, the income is 1200, possible bundles of product are:

The optimal consumer's bundle will be the point of intersection of budget line with U-curve.

If $U = x + y$ , where $x$ -quantity of first product and $y$ -quantity of second product then $U$ will be 40;35;30;25;20.

And the optimal consumer's bundle is 40 units of first product and 0 units of second product.

2)

It is a perfectly substitutable products

Properties:

- Is a descending curve. The negative slope of indifference curves is a consequence of monotonicity - the growth of one product lead to decrease a quantity of other good.

- Is strictly convex. If we consistently picking up a first unit of the goods, then we must add more every second unit of the goods.