Question

1. Suppose you have a budget of 1000 taka. The price of one unit of X is 20 taka, and the price of one unit of Y is 10 taka. If X provides you utility and Y gives you disutility, what is the equilibrium amount of X and Y for the consumer? Explain your answer using appropriate graph.

     (10)

Answer 1

Given budget = 1000 taka

Price of one unit of X = 20 taka

Price of one unit of Y = 10 taka

Thus, the consumer can purchase 50 units of X, or 100 units of Y, or some allocation in between. This constitutes the budget line.

The budget line only shows capability, not the utility.

Thus, the consumer can spend money as per these allocations.

---

Now, if X provides utility, and Y provides disutility, the consumer will spend all the money only on X.

Thus, the consumer will buy 50 units of X, and 0 units of Y. This is the equilibrium.

This allocation will yield the maximum utility.

To show this, the indifference curve has to be shown:

Thus, the IC is tangential to the budget line at Point E.

Point E has coordinates (50, 0).

This is the optimal consumption bundle for the consumer, which gives maximum utility.