Answer to Question #196738 in Microeconomics for haider

Question

a) Identify the impact of an increase in the income from Rs. 1,500 to Rs. 1,800 on Inayah’s consumption level. Also illustrate it using the two-dimensional labeled diagram. (1 Mark) 

b) Assume that Inayah’s consumption of milk and cookies give her following level of utility:

(2 Marks)

Quantity

MU _milk

MU _cookies

1

400

450

2

350

200

3

200

150

4

100

100

5

70

60

6

30

30

7

0

0

 i. Find the optimal level of consumption.

 ii. Find the consumer equilibrium using the two-dimensional labeled diagram.

Answer 1

(a)Inayah's purchasing power increases and the budget line shifts to the right.

(b)

(i)

consumer equilibrium

$\frac{MUx}{Px}=\frac{MUy}{Py}( optimal \space consumption)$

the consumer will not consume at point where $\frac{MUx}{Px}$ is not equal to $\frac{MUy}{Py}.$

(ii)

The consumer will not be in equilibrium

The indifferent curve is not tangent to the budget line.