Answer to Question #240632 in Microeconomics for hiii

Question

Suppose you have an income of $24 and the only two goods you consume are apples (x1) and peaches (x2). The price of apples is $4 and the price of peaches is $3.

Suppose that your optimal consumption is 4 peaches and 3 apples.


a. Illustrate this in a graph using indifference curves and budget lines.

b. Now suppose that the price of apples falls to $2 and I take enough money away from you to make you as happy as you were originally. Will you buy more or fewer peaches? Provide a graphical representation.

Answer 1

a.

Figure-1 shows the optimal consumption bundle of the individual when they consume 4 peaches and 3 apples as follows:

In Figure-1, the x-axis represents the apples and the y-axis represents the peaches.

According to Figure-1, the optimal consumption bundle of the individual is at Point E when the consumer consumes 4 peaches and 3 apples, respectively.

b.

Figure-2 shows the impact on the optimal consumption of the consumer when the price of apple falls to $2 as follows:

In Figure-2, the x-axis represents the apples and the y-axis represents the peaches.

According to the scenario, the price of the apple is initially $2. If the price of the apple falls to $2, the apples become less expensive than peaches. Hence, the consumer will consume fewer peaches.