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Illustrate the set of feasible bundles using a figure

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Let m be the income of the consumer, p1 and p2 the prices of good 1 and good 2, respectively. To simplify, normalize the price of good 1, that is p1 = £1.

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Question 1: Write down the budget constraint and illustrate the set of feasible bundles using a figure.

Question 2: Suppose that m = £100 and that p2 = £10. Find the optimal bundle for the consumer. In other words, find the combination of x1 and x2 that maximizes the consumer's utility when the prices are p2 = £10, p1 = £1 and her income is m = £100.

Question 3: Suppose still that m = £100 but now the price of good 2 has increased to p2 = £30. Find the optimal bundle for the consumer. In other words, find the combination of x1 and x2 that maximizes the consumer's utility when the prices are p2 = £30, p1 = £1 and her income is m = £100.

Question 4: How can we explain the drastic change in demand for the goods when the price of good 2 increased from £10 to £30?

Reference no: EM132422740

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