Answer to Question #232900 in Microeconomics for Binaya

Question

. Bhatbhateni Departmental Store fixes the following prices for commodities X and Y. The
prices of commodities X and Y are Rs.20 and Rs.50 per unit respectively. A household has
Rs.6000 to spend per month on commodities X and Y.
Referring the information mentioned above, answer the following questions.
i. Sketch the household budget line.
ii. Assume that the household splits its income equally between X and Y. Show
where the household ends up on the budget constraint.
iii. Suppose that the household income increases to Rs.10000, sketch the new
budget line facing the household.
iv. After the increase in income, the household spends Rs.1500 on Y and Rs.8500
on X. This implies that X is a normal or inferior good? What about Y good?

Answer 1

Solution:

i.). The household budget as per the below graph:

 

 

ii.). Assuming the household splits its income equally between X and Y. The household will consume 150 units of good X and 60 units of good Y as indicated on the budget constraint graph:

 

iii.). Suppose the household income increases to Rs.10,000, the quantity for Good X will increase to 500 while the quantity for Good Y will increase to 200 since the consumer will be able to afford more of both goods. The budget constraint curve will shift outwards as indicated on the graph:

 

iv.). Good X is a normal good (luxury) since its demand increases more than proportionally as income increases, such that the expenditure of the good becomes a greater proportion of the overall spending.

Good Y is an inferior good since its demand has declined significantly as a result of income increase.