Answer to Question #248109 in Microeconomics for SHREYA

Question

Suppose the price ratio of two goods is 3/4 and Shubman, another student in college has a budget of $100. If the price of good X increases from 6 to 12, what is the new price

ratio? Show your work

Answer 1

Solution:

The price ratio = the slope of the budget

The budget constraint: PxX + PyY = I

Price ratio = $\frac{3}{4}$

Initial price of good X (Px) = 6

Price ratio = $\frac{Px}{Py}$

$\frac{3}{4} = \frac{6}{Py}$

$3 = \frac{24}{Py}$

Py = 8

6X + 8Y = 100

The initial price of good Y = 8

Increase in the price of good X to 12:

The new price ratio = $\frac{Px}{Py} = \frac{12}{8} = \frac{3}{2} = 1.5$

The new price ratio = $\frac{3}{2} = 1.5$