Answer to Question #141599 in Microeconomics for ANKIT

Question

 Assume that the budget constraint is given by the equation Q₁ = 1,000 – 5Q₂, where Q₁ and Q₂ represent quantities of two goods. Normally, indifference curves are convex to the origin, but assume in this case that they are linear with a constant slope of –2.

i)        Graph the budget constraint (with Q1 on the vertical axis).

ii)      Draw in a set of indifference curves and label the utility-maximizing point.

iii)                Where would the utility-maximizing point have been if the indifference curves had a constant slope of –6?

Answer 1

i) The budget constraint (with Q1 on the vertical axis) is the downward-sloping line through the points (0; 1,000) and (200; 0).

ii) A set of indifference curves is a set of downward-sloping lines with the slope of -2, the utility-maximizing point is the intersection of the budget constraint and the indifference curve.

iii) The utility-maximizing point would shift to more Q2 and less Q1 consumed if the indifference curves had a constant slope of –6.