Group 7
Padiernos, Riane
Porciuncula, Althea Pam
Redulla, Jericho
Sanchez, Renee Alyanna
Sangel, Jonas
Assignment Chapter 4
Direction: Read and analyze each question carefully and answer the following questions on the
space provided.
A. A consumer must spend all of her income on two goods (X and Y). In each of the
following scenarios, indicate whether the equilibrium consumption of goods X and Y will
increase or decrease. Assume good X is a normal good and good Y is an inferior good.
1. Income Doubles
When income doubles, the equilibrium consumption for good X will increase and the
other way around happens for good Y.
2. Income Quadruples and all Prices Double
When income quadruples and all prices double, the equilibrium consumption for good
X will increase while the equilibrium consumption for good Y will decreases.
3. Income and all Prices Quadruple
When income and all prices quadruple, the equilibrium consumption for good X will
increase and the equilibrium consumption for good Y will decrease.
4. Income is halved and all prices double
When income is halved and all prices doubled, the equilibrium consumption for good
X will decrease and the equilibrium consumption for good Y will increase.
B. A consumer must divide $600 between the consumption of product X and Y. The
relevant market prices are Px = $10 and Py = $40
5. Write the equation for the consumer’s budget line
Y = 15 – 1/4X
6. Show how the consumer’s opportunity set changes when the price of good X
increases to $20. How does this change alter the market rate of substitution between
goods X and Y?
As the price of good X increases to $20, the opportunity set of the consumer
decreases as the budget line will rotate in a clockwise manner. Given that, the market
rate of substitution will decrease from – 1/4X to – 1/2 X which states that for every
decrease in the consumption of good X, there will be an increase in the consumption
of good Y by 2 units.
C. A consumer’s budget set for two goods (X and Y) is 600 > 3X + 6Y
7 – 8. Illustrate the budget set in a diagram. Does the budget set change if the prices of
both goods double and the consumer’s income also doubles?
The budget set will not change when both goods double their prices as well as the
consumer’s income.
9. Given the equation for the budget set, can you determine the price of the two goods
and consumer’s income?
600 > 3X + 6Y
Given this budget set, the consumer’s income is at Php600 and the price of good X is
at Php3 while the price of good Y is at Php6.
10. Income-leisure Model
Suppose a worker received a fixed payment of Php100 plus Php10 for every hour
he/she works.
a. What is the minimum the worker can earn in a day?
Php100
b. What is the maximum total earning the worker can receive if he/ she is restricted
to a maximum of 12 hours of work per day?
100 + 10(12) = 100 + 120 = Php220
