2. Suppose a consumer has an income of $100. P1=10 and p2=10. a. Draw the consumer's budget constraint b. On the same drawing, add an [indifference curve on which the optimal basket lies. Assume the indifference curve is convex as usual c. On the same drawing, add an indifference curve which has a lower utility level than the optimal basket. Make sure to include the intersections of the curve with the budget constraint, and carefully explain why they cannot be optimal although they are on the budget line. Solution - max X1 = I/P1 = 100/10 = 10. Similarly, maximum X2 = 10. So the budget line is X2-10-X1. Once you add the curves, you will see that the curve intersecting the budget line lies
2. Suppose a consumer has an income of $100. P1=10 and p2=10. a. Draw the consumer's budget constraint b. On the same drawing, add an [indifference curve on which the optimal basket lies. Assume the indifference curve is convex as usual c. On the same drawing, add an indifference curve which has a lower utility level than the optimal basket. Make sure to include the intersections of the curve with the budget constraint, and carefully explain why they cannot be optimal although they are on the budget line. Solution - max X1 = I/P1 = 100/10 = 10. Similarly, maximum X2 = 10. So the budget line is X2-10-X1. Once you add the curves, you will see that the curve intersecting the budget line lies
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.4P
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Transcribed Image Text:2. Suppose a consumer has an income of $100. P1=10 and p2=10.
a. Draw the consumer's budget constraint
b. On the same drawing, add an indifference curve on which the optimal basket lies.
Assume the indifference curve is convex as usual
C.
On the same drawing, add an indifference curve which has a lower utility level
than the optimal basket. Make sure to include the intersections of the curve with
the budget constraint, and carefully explain why they cannot be optimal although
they are on the budget line.
Solution - max X1 = I/P1 = 100/10 = 10. Similarly, maximum X2 = 10. So the budget line is
X2-10-X1. Once you add the curves, you will see that the curve intersecting the budget line lies
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