Answer to Question #221776 in Microeconomics for Rahul jain

Question

Suppose the prices of the commodities A and B are p₁ and p₂ respectively. The consumer purchases X₁ unit of A and X₂ units of B. Suppose, the consumer has an income denoted by M and the consumer would spend the entire amount of M on these two commodities. How are p₁, p₂, X₁, X₂ and M related?

Answer 1

We are given the price of commodity A is p₁ and the price of commodity B is p_2.

Now, X₁ units of commodity A is purchased and X₂ units of the commodity B is purchased 

1 unit of commodity A costs p₁

This means X₁ units of commodity A costs X₁p₁

Similarly, 

1 unit of commodity B costs p₂

This means X₂ units of commodity B costs X₂p₂

Now, the total income is M and the entire income is spent on purchasing the two commodities.

Therefore, the sum of the price of the two commodities is M.

This means:

$X_1p_1+X_2p_2=M$

Therefore, $p_1, p_2, X_1, X_2, M$ are related by the equation $X_1p_1+X_2p_2=M$

Answer: $p_1, p_2, X_1, X_2, M$ are related by the equation $X_1p_1+X_2p_2=M$