Answer to Question #42540 in Economics for huqingke

Question

1. A consumer splits their income equally between two goods. If the price of one good increases by 10% and their income increases by 5%, show that the consumer’s optimal consumption bundle will change despite them being able to afford their original bundle.

Answer 1

If consumer splits their income equally between two goods, and the price of one good increases by 10% and their income
increases by 5%, consumer’s optimal consumption bundle will change from its original bundle, because after price increase first good becomes less attractive for the customer and he will buy more of second good. So, after income increase the customer will increase consumption of the second good and decrease consumption of the first good.