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Unformatted text preview: 2. Consider the budget line below. Income is $100 per month, and the price of the x good is $10 and the price of the y good is $10. Please answer the following questions. a. Explain why bundle A is not a utility maximizing choice. Be sure to define relative price and marginal rate of substitution in your answer and use them in your explanation. b. Graph the new budget line if the price of the x good falls to $5. Find the new bundle ( 29 2 2 , x y graphically that maximizes utility given the change. c. Graph the new budget line if the price of the x good falls to $5 and income falls to $50. Find the new bundle ( 29 3 3 , x y that maximizes utility given this change. 2 4 6 8 10 12 2 4 6 8 10 12 Good x Good y IC 1 IC 2 A B 1 x 1 y...
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This note was uploaded on 02/06/2012 for the course ECON 251 taught by Professor Blanchard during the Summer '08 term at Purdue.
- Summer '08
- Market Equilibrium