Answer to Question #291927 in Microeconomics for Dessu

Question

given utility function u=x0.5y0.5 where px=12 birr py=4 birr and the income of the consumer is M=240 birr.

a)draw the budget line.

b)what happens to the original budget line if the budget falls by 25%

c)what happens to the original budget line if the price of x doubles

d)what happens to the original budget line if the price of y falls to 2 birr

Answer 1

$U=(X^{0.5}Y^{0.5})$

$P_x= 12$

$P_y= 4$

m= 240

a) Budget line

12X+4Y=240

b) If the budget falls by 25%

New budget= 75% $\times 240= 180$

New budget line 12X+4Y=180

Diagramatically it can be shown as below

c) If price of X doubles

New price of X= 24

New budget line= 24X+4Y= 240

Diagramatically is as below;

d) If the Price of Y falls to 2

New budget line= 12X+2Y=240

The budget line moves upwards on the Y intercept as the consumer can afford more of Y while the X intercept remains constant. This can be explained diagramatically as below;