Use the following graph showing a consumer’s budget line and some indifference curves to answer the following questions. The consumer’s income is $600

a. The price of Y is $______ and the price of X is $______. In equilibrium the marginal rate of substitution is _____. This implies that the consumer should buy _____ unit of X and ______ units of Y

b. If the consumer is buying the combination at point A, the MRS is ________________ (greater, less) than the price _________, so the consumer should buy more ______ and less ______ in order to increase utility (alternatively, notice that by buying a bit more _______ and a bit less ______ the consumer would remain on the same indifference curve – say at a point C - but would pay less than $600. Draw in the graph above, a lower budget line and a possible point C on the same indifference curve of point A). The consumer would buy no combination on indifference curve III because _______________________________________________________________________.

c. If the consumer is buying the combination at point B, the MRS is ______ than the price ____________, so the consumer should buy more ______ and less ______ to increase utility (alternatively, notice that by buying a bit more _______ and a bit less ______ the consumer would remain on the same indifference curve – say at a point D - but would pay less than $600. Using the same lower budget line that you have drawn above, draw the point D on the same indifference curve as point B). At point B, MUX PX is ____________ than the MUY P

d. Draw in the graph the point E, at which MUX PX = MUY PY .

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40- 30 20- 10- II 10 20 30 40 50 Quantity of X Quantity of Y 40- 30 20- 10- II 10 20 30 40 50 Quantity of X Quantity of Y