Question

A consumer must divide shs.250 between the consumption of product X and product Y. The relevant market prices are Px = shs 5 and Py = shs.10. a. Write the equation for the consumer’s budget line. b. Illustrate the consumer’s opportunity set in a carefully labelled diagram. c. Show how the consumer’s opportunity set changes when the price of good X increases to shs.10. How does this change the market rate of substitution between goods X and Y?

Answer 1

a) Budget Equation

5X+ 10Y= 250

b) Illustration in a diagram

c) When price of X increases to 10

New budget= 10X+ 10Y= 250

The opportunity cost changes to -1

Marginal rate of substitution will also be -1