Answer to Question #249007 in Microeconomics for Roshan

Question

 Suppose the price ratio of two goods is 3/4 and Shubman has a budget of $100. If his budget increases to $150 and the prices of the two goods stay the same, what is the new price ratio?

Answer 1

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

Budget increases from $100 to $150.

$\implies$ Budget increases by $50 which is half the original budget.

Thus, price ratio will also increase by half the original ratio:

$\frac{3}{4}\times\frac{1}{2}=\frac{3}{8}$

The new price ratio will be:

$\frac{3}{4}+\frac{3}{8}=\frac{9}{8}$ .

New ratio is $\frac{9}{8}$ .