Reference no: EM132001352

Oranges cost $1/kg and apples cost $0.5/kg. Niki has $12 to spend on apples or oranges. He chooses to buy 10 kg of apples.

1. Suppose from now on that instead of an income of $12, Niki owns 10 kg of apples and 7 kg of oranges, which he can sell at the original prices ($1/kg for oranges and $0.5/kg for apples), if he desires so. Draw (on a new diagram!) Niki's budget line.Hint: whatever the prices of oranges and apples are, Niki can always afford to consume 10 kg of apples and 7 kg of oranges, simply by not selling or buying any fruits.
2. Suppose that the price of apples increases to $1/kg. Draw Niki's budget line and show the new optimal consumption basket. Can you say for sure whether Niki would increase his consumption of oranges?