Question

2 (a) Emily has a budget constraint with the form m ≥ pxx + pyy, (where m = income, px, py are prices of x and y ), 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 Emily's behaviour consistent with the (weak) axiom of revealed preference? (b) Suppose Emily has no income, but has 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 she 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 Emily better or worse off as a consequence of this price increase?

Answer 1