Question #99883

Let the utility function be given by

u(x1, x2) = √x1 + x2.

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.

(a) Write down the budget constraint and illustrate the set of feasible bundles using

a figure.

u(x1, x2) = √x1 + x2.

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.

(a) Write down the budget constraint and illustrate the set of feasible bundles using

a figure.

Expert's answer

(a) The budget constraint is a line, which shows all possible combinations of consumption of goods x1 and x2.

Its equation is:

p1x1 + p2x2 = m,

if p1 = £1, then: x1 = m - p2x2.

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