Q.1 Consider a typical consumer with a monthly income of Rs. 240. His consumption bundle is...

Transcribed Image Text:

Q.1 Consider a typical consumer with a monthly income of Rs. 240. His consumption bundle is composed of only two commodities: cola (x) and fries (y). The market prices for each unit of these commodities are Rs. 40 and Rs. 30, respectively. The optimal consumption bundle of this consumer is (40, 30). Use this information to solve the following parts: [Total Marks: 35] a) Illustrate the above information using an appropriate consumer theory model. Make sure to provide all labeling to your figure. b) If the per unit price of cola decreases to Rs. 20 and enough money is taken away from the consumer leaving him just as satisfied as he was prior to the price change. What do you expect would happen to the purchase of fries for this consumer? Indicate this change on your diagram from part a) and provide reasonable labeling for this part. c) Now what if you are told that in actuality, no income is taken away from the consumer so his aggregate monthly income stays at Rs. 240 even after the reduction in the price of cola to Rs. 20. Following this, an observation is made where it is revealed that the consumer in fact did not change the consumption of fries in the final equilibrium. Are you able to conclude whether fries are a normal or inferior good for this consumer? Also show the new optimal bundle on the diagram that you've made in part a). Q.1 Consider a typical consumer with a monthly income of Rs. 240. His consumption bundle is composed of only two commodities: cola (x) and fries (y). The market prices for each unit of these commodities are Rs. 40 and Rs. 30, respectively. The optimal consumption bundle of this consumer is (40, 30). Use this information to solve the following parts: [Total Marks: 35] a) Illustrate the above information using an appropriate consumer theory model. Make sure to provide all labeling to your figure. b) If the per unit price of cola decreases to Rs. 20 and enough money is taken away from the consumer leaving him just as satisfied as he was prior to the price change. What do you expect would happen to the purchase of fries for this consumer? Indicate this change on your diagram from part a) and provide reasonable labeling for this part. c) Now what if you are told that in actuality, no income is taken away from the consumer so his aggregate monthly income stays at Rs. 240 even after the reduction in the price of cola to Rs. 20. Following this, an observation is made where it is revealed that the consumer in fact did not change the consumption of fries in the final equilibrium. Are you able to conclude whether fries are a normal or inferior good for this consumer? Also show the new optimal bundle on the diagram that you've made in part a).

Answer rating: 100% (QA)

A Illustrate the above information using an appropriate consumer theory model Make sure to provide all labeling to your figure The following graph illustrates the consumer theory model in this scenari... View the full answer