Question

A consumer has 250 dirhams to spend on goods X and Y. The market prices of these two goods are Px a) b) c) d) = 10 and Py = 25 Determine the equation for the consumer’s budget line. Illustrate the consumer’s opportunity set in a carefully labeled diagram. What is the MRS between goods X and Y? Show how the consumer’s opportunity set changes if income increases by 250. e) How does this increase affect the MRS?

justify your answer as possible and please don't write by hand

Answer 1

A) consumers budget line

250 = 10x + 25y

B) 10x + 25y = 250

Or, 25y = 250 - 10x

Or, y = 250/25 - (10/25) x

Or, y= 10-0.4x

C) MRS = MUx / MUy

At equilibrium MRS = px/py = 10/25 = 0.4

D) ​​​​

E) Increase in income does not affect MRS as it depends on the price of the products not on the income. MRS will be same.