Assume the prices of product X and Y are $1.50 and $1.00, respectively, and that Mr. Chen has $24 to spend. Assume a normal indifference curve. Assume that Mr. Chen needs 4 of product X to maximize utility.

a. What is the slope of Mr. Chen’s budget constraint.

b. Write out Mr.Chen’s equation to his budget constraint.

c. What combination of X and Y will Mr. Chen purchase?

d. Now assume that the price of Y changed from $1.00 to $2.00, redo part a, b and c,

e. Draw the budget constraint graph and indifference curve before the change and after the change in the price of Y. Explain the substitution and income effect for this change.

6. Now assume instead of a price change, Mr. Chen’s budget changed from $24 to $30, and the prices are still $1.50 and $1.00 for product X and Y respectively. Redo parts a, b, c and draw the before and after change on the budget constraint and indifference curve.

Answer rating: 100% (QA)

Mr Chens Budget and Utility Optimization a Slope of Budget Constraint The slope of the budget constraint is equal to the negative ratio of the prices of the two goods In this case the slope is Slope P... View the full answer