A consumer could consume at G, for example, but would be on a higher indifference curve at H. This means that to maximise utility the consumer would consume Q1 of product A and Q2 of product B.
The consumer is maximising utility where the budget line and indifference curve are tangent, i.e., MUB/MUA = PB/PA.
An Increase in Income
An increase in income shifts the budget line out parallel. The new combinations of products that maximise utility can be identified.
If this is a normal good, an increase in income increases the quantity demanded.
Inferior goods have a negative income elasticity of demand. Demand falls as income rises.
The slope of a budget constraint is -(the price of the good on the x-axis divided by the price of the good on the y-axis).
A. an increase in the price of soda
Only an increase in the price of soda could have caused the budget line to shift as shown in the graph.
A. the slope of the budget-constraint line will change.
The slope of the budget constraint is the relative price ratio between the two goods represented on the axes. Thus, if one of the prices changes, the slope of the budget constraint will also change. If the price of good x increases, the slope of the budget constraint increases. If the price of good x decreases, the slope of the budget constraint decreases.
A. unit elastic
I. a desire to consume a different bundle
A. the substitution effect is greater than the income effect.
A. at point A
With $5, the maximum number of chocolate bars or cans of soda that can be bought are 10 and 10 respectively. To maximize utility, find where the maximum utility curve is tangent to this income constraint.
A. Bobby views soda as an inferior good.
Bobby will consume more soda if his income increases.