Alice has an income of $240 per month. She allocates all of her monthly income between good X and good Y, and she has strictly convex preferences. In January, the price of good X is $8 per unit and the price of good Y is $8 per unit. In February, the price of good X falls to $4 per unit and the price of good Y increases to $12 per unit.

In February, Alice purchases 15 units of good X and 15 units of good Y. Assume that the bundle purchased by Alice is the optimal one.

1. Represent Alice’s optimal bundle in February on the diagram by employing all the relevant tools such as her indifference curve and her budget constraint.

2. Determine whether Alice is better off, worse off, or exactly as well off after the price change in February compared to January. Explain.

Answer rating: 100% (QA)

Alice is better off after the price change in February compared to January The budget constraint shi... View the full answer