Reference no: EM133077379

Suppose an individual consumes two goods - X and Y, which are substitutes such that consumer is willing to trade 2 units of X for one unit of Y (that is, two units of X give the same utility as one unit of Y).

-If Px = $5 and Py = $6, and the income of the individual is $600, then what is the consumption bundle that will maximize the utility of the individual? Show the calculation/intuition behind your answer. Also draw the corresponding indifference curves and budget lines that demonstrate your answer.

-What is the new optimal bundle if price of good X falls to $2 per unit? Indicate this equilibrium on a new graph (with the corresponding indifference curve and budget line).

-For the answer in part (b) please show the corresponding substitution and income effects on a graph. Also discuss the associated calculation/intuition.

-Assume the conditions in (a) with one difference - the individual now considers the two goods to be perfect complements (instead of substitutes), that is, the consumer use the goods X and Y in a 1:1 ratio (akin to the right shoe-left shoe example). What is the new optimal bundle of the consumer? Explain your answer using both a graph, and mathematical/economic intuition.