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(a) What is a budget line ? What does the point on it indicate in terms of prices ? (b) A consumer consumes only two pieces of goods X and Y . Her money income is Rs 24 and the price of price of goods X and Y are Rs 4 and Rs 2respectively. Answer the following questions: (i) Can the consumer afford a bundle 4X and 5Y ? Explain. (ii) What will be the MRS_(xy)when the consumer is in equilibrium ? Explain. |
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Answer» SOLUTION :(a) Budget line shows all possible combinations of the two goods that a consumer can buy at given income and prices of commodities The point on budget line in terms of prices indicate that prices are IMPLICITLY in the budget line. (b) (i) No , consumer cannot afford a bundle 4 X and 5 Y because his money income i.e. ., 24 is less than the EXPENDITURE on bundle 4 X and 5 X `(P_x.X+ P_y.Y = 4.4 (16) + 2.5 (10) = 26).` (ii) A we know, a consumer is in EQUILIBRIUM when `MRS_(xy)=P_x//P_y` So , in equilibrium `MRS_(xy)=4//2=2` |
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