Suppose a consumer has $120/week to spend on two consumer goods, good x and good y.
(a) Assume that the consumer was originally faced with price scenario 1. Now suppose that the price of x rises to $4 and the consumer chooses 15 units of x. How many units of y would be chosen? What is the new relative price of x? Illustrate this new choice with an indifference curve. Can you tell from previous results how the consumer thinks of the two goods in terms of normal/inferior? [Hint: Think about and explain the substitution and income effects.]
(b) Following from part (c), suppose that income now increases to 360. Given what you know about the consumer’s preferences, can you predict a possible equilibrium on the new budget line?
I = $120/week (a) There is not enough information to find price and quantity of good y and other data. (b) If income now increases to 360, consumer will afford more units of x and y, and new budget line will intersect the higher indifference curve in point of new equilibrium.