Question

. If the price of commodity X is 10 Birr per unit and the price of commodity of Y is 8 Birr per
unit, write the budget line equation assuming that the consumer spends all of his 500 Birr income
on the two commodities, X and Y. 5 Mention at least one assumption which is common for both
the cardinal and the ordinal utility approaches

Answer 1

1.

Price of commodity X= 10 Birr per unit

Price of commodity Y= 8 Birr per unit

Income=500 Birr

Suppose income is denoted by M:

The budget equation will be:

$M=P_X.X+P_Y.Y$

$M=10X+8Y$

$500=10X+8Y$

2.

Both the cardinal and ordinary utility approaches assume that consumers are rational. They assume that a consumer is rational in the sense that he/she maximizes utility subject to his/her limited income.

Symbolically,

$Maximize U=f(x,y)$

$Subject to M=P_x$

where U= Utility or satisfaction

M= Money income or budget constraint.