Answer to Question #248109 in Microeconomics for SHREYA

Question #248109

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


1
Expert's answer
2021-10-07T16:14:01-0400

Solution:

The price ratio = the slope of the budget

The budget constraint: PxX + PyY = I

Price ratio = 34\frac{3}{4}

Initial price of good X (Px) = 6

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

34=6Py\frac{3}{4} = \frac{6}{Py}


3=24Py3 = \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 = PxPy=128=32=1.5\frac{Px}{Py} = \frac{12}{8} = \frac{3}{2} = 1.5


The new price ratio = 32=1.5\frac{3}{2} = 1.5


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