Question

(a) A consumer has a budget constraint which takes the usual form m ≥ pxx + pyy, (where m is income and px, py are the prices of x and y respectively), and is observed to choose (x, y) = (3, 5) when (px, py) = (1, 2) and (x, y) = (5, 3) when (px, py) = (2, 1). Is the consumer’s behaviour consistent with the (weak) axiom of revealed preference?

(b) Suppose an individual has no income, but is endowed with 10 units of x, 4 units of y, and regards x, y as perfect one-for-one complements: she has utility function given by u(x, y) = min{x, y}. How much of x and y will the individual consume if the prices of x and y are px = 2, py = 1 respectively? How will these choices of x, y change if px rises to 3? Is the individual better or worse off as a consequence of this price increase?

Word limit per question: 400 words (200 words per part of question)

Answer 1