Consider the following prices and income: px =$2 and py =$3 I=$156 Let A denote the bundle (24,36). 

(a) Draw the budget constraint given prices and income above (making clear what are the quantities of the other good when x =0 or y =0, and mark A in the graph). What is the equation for the budget line? 

(b) Consider a change in prices: px =$3 and py =$1 Draw the new budget constraint (and the relevant points) and present the equation for the new budget line. i. Assume an agent has strongly monotone preferences and argue why A will not be an optimal choice under the new prices. 

(c) Consider now prices px =$3 and py =$2.5 How much income a consumer should receive so she is able to afffford bundle A under the new prices? Draw the budget constraints for I=$156 and for the adjusted income (and the relevant points). 

(d) Consider now a difffferent situation. Rather than having income I=$156, the consumer has an endowment (x,y)=(3,50). For the original prices (px =$2, py =$3), the endowment is worth $156 (=$2 × 3 + $3 × 50). Now consider the same prices from item (b), and draw the consumer’s budget constraint (and the relevant points). • Will the consumer be able to purchase bundle A now? Discuss.

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1 a Px 2 Py 3 I 156 Bundle A 24 36 A budget constraint represents various combinations of two commod... View the full answer