Answer to Question #271823 in Microeconomics for NOVA12

Question

A consumer is in equilibrium at point A in the accompanying figure. The price 

of good X is $5. a. What is the price of good Y? b. What is the consumer's income? c. At point A, how many units of good X does the consumer purchase? d. Suppose the budget line changes so that the consumer achieves a new equilibrium at point B. What change in the economic environment led to this new equilibrium? Is the consumer better off or worse off as a result of the price change? 

Answer 1

(a)

Since the slope of the line through A is $\frac{-20}{20}=-1$ , and the price of X is $5, then the price of Y is also $5.

(b)

The maximum quantity of good X that is affordable with the given income (M) is:

$X=\frac{M}{P_X}$

The price of good X, $P_X=$ $5 and the maximum affordable quantity of good X is 20 units. Substituting the values in the relationship gives:

$X=\frac{M}{P_X}\implies 20=\frac{M}{5}$

$M=$ $100.

(c)

Given M=$100, $P_x=$ $5.

$X=\frac{100}{5}=20.$

(d)

An increase in income causes the shift in equilibrium from point A to point B. The consumer becomes worse off because consumers will generally spend more if they experience an increase in income. For instance, the price of commodities will go up leaving the consumer with less income to spend on other items.