Answer to Question #152844 in Microeconomics for K.A Abeysignhe

Question

1. Health care cost is expected to increase in Malaysia. Let X represent

(f\JJ the quantity of medical cost, Y represent the quantity of other goods and income (M) be measured in hundreds of Ringgit Malaysia. The price of medical services and other goods in terms of dollars per minute, with

M = 600, Px = 8, and Py = 10.

(a) Illustrate the budget set, and determine the market rate of substitution.

(b) Show in your graph what happens to the budget constraint if Px decreases to RS.6.

(c) What is the meaning of the slope of the two budget constraints?

Answer 1

(a) The budget set is a line between points (75; 0) and (0; 60), 75 units of X and 60 units of Y are maximum possible amounts to be produced.

The market rate of substitution is 10/8 = 1.25 units of X can be exchanged for 1 unit of Y.

(b) If Px decreases to RS.6, then the budget constraint will shift leftwards.

(c) The absolute value of the slope represents the relative prices of the two goods, X and Y.