Question

In the context of consumer utility maximization in a two good world where initially the best point for the consumer is to take some amount of both good x and good y, answer the following.

1) what happens to the level of consumer utility if the price of x falls?

2) what happens to the level of consumer utility if consumer income rises?

3) what happens to the level of consumer utility if both the price of good x and the price of good y double and consumer income doubles?

Answer 1

1) When price of x falls then consumer is able to purchase more good x with same level of income. This increases consumer utility as consumer is able to buy more good.

2) Increase in consumer income means purchasing power of consumer increases which enable him to buy more of good x and y. This enable consumer to consume bundle lie on higher indifference curve. So, level of consumer utility rises.

3) When price of both goods and income doubles then utility of consumer remains same as now also, consumer is able to purchase same units of goods because real income does not increases.