JEOFIL DS.

MADELOZO #28
1A3
1. A Consumer has $300 to spend on goods X and Y. the market prices of these two goods are Px =
$15 and Py = $5.

A. What is the market rate of substitution between goods X and Y?

Market Rate of Substitution = -Px / Py = -15 / 5 = -3

B. Illustrate the consumer’s opportunity set in a carefully labeled diagram.

C. Show
how the

consumer’s opportunity set changes if income increases by $300. How does the 300$ increase
in income alter the market rate of substitution between goods X and Y?

Increasing income expands the budget set/opportunity set. Since the slope is unchanged,
so is the Market Rate of Substitution.

2. A consumer is in equilibrium at point A in the accompanying figure. The price of good X is $5.

A. What is the price of good Y?

X = -M/Px y = M/Py

Therefore, Py = $5

20 = 100/5 20 = 100/Py

B. What is the consumer’s income?

JEOFIL DS. MADELOZO #28
1A3
M = $100

C. At point A, how many units of good X does the consumer purchase?

X = (M-PyY)/Px

X = ($100 - $50)/$15 Therefore, X = 10 units of good X purchased

X = 50/5

D. Suppose the budget line changes so that the consumer achieves a new equilibrium at point
B. What change in economic environment led to this new equilibrium? Is the consumer better
off or worse off as a result of the price change?

The Price of good Y decreased to $2.50. The result of the change is better for the consumer
because he achieves higher level of satisfaction at Point B.