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Suppose the price of X is $5 and the price of Y is $10 and a hypothetical household has $500 to spend per month on goods X and Y a
Suppose the price of X is $5 and the price of Y is $10 and a hypothetical household has $500 to spend per month on goods X and Y
a. Sketch the household budget constraint.
b. Assume that the household splits its income equally between X and Y. Show where the household ends up on the budget constraint.
c. Suppose that the household income doubles to Rs. 1000. Sketch the new budget constraint facing the household.
d. Suppose after the change the household spends Rs 200 on Y and Rs 800 on X. Does this imply that X is a normal or an inferior good? What about Y?
Expert Solution
Answer:
a. As per the data given in the question the budget constrained equation is:
5x + 10y = 500
d. With the increase in income the demand for x increases therfore x is a normal good while the demand of y don’t increase with the same proportion as the salary increases therfore y is an inferior good.
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