Question

My demand functions for goods 1 and 2 are ?1(?1,?2,?) and ?2(?1,?2,?). If x1(2,5,90) = 20, x2(2,5,90) = 10, x1(2,4,90) = 15, and x2(2,4,90) = 15, can you say anything about how I would rank the commodity bundles (20,10) and (15,15)?

Answer 1

We can see that initially, p1 = 2; p2 = 5; and m = 90
So, x1 = 20 ans x2 = 15

Then p1 = 2, p2' = 4, and m = 90
So, x1 = 15 and x2 = 15

We can see that price of good 2 has decreased with p1 and m remaining same. So, the budget line tilts outward along the vertical axis with horizontal intercept remaining the same. Thus, the new consumption bundle lies on a higher indifference curve, IC as compared to the original bundle. So, new bundle gives higher utility because higher IC implied more satisfaction.

Thus, (15, 15) > (20, 10)
(that is bundle (15,15) is preferred to bundle (20,10))