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2. Suppose that the price of X is $20 and the price of Y is $10...

2. Suppose that the price of X is $20 and the price of Y is $10 and a hypothetical household has $1000 to spend per month on goods X and Y.

(a) Sketch the household budget constraint where the amount of Y is measured along the vertical axis and the amount of X is measured along the horizontal axis.

.

(b) Assume that the household splits its income equally between X and Y. Show where the household ends up on the budget constraint.

(c) Suppose that the household income doubles to $2000. On your graph in part (a), sketch the new budget constraint facing the household.

(d) Suppose after the change the household spends $400 on X and $1600 on Y. This implies that X is a normal or inferior good? What about Y?

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