Question

need an appropriate diagram for the answer. thanks

2. Suppose there are only two goods, good X and a composite good. A rational consumer with a weekly income of $100 consumes 5 units of good X when the price of good X is $10 per unit. When the price of good X decreases to $5 per unit, she consumes more of good X; but her expenditure on good X decreases. True or False: If follows that her price-consumption curve must be downward sloping in this range. Explain your answer with the use of an appropriate diagram.

Answer 1

Price of good X = $10

Assume price of composite good is also $10

Total income= $100

Max good X and composite good consumption = 10 units which forms the budget constraint of AB.

When price of good X falls to $5, budget constraint shift to AB'.

When budget constraint is AB, consumer consumes (5,5) units of both goods. When price falls, there are tow cases which a consumer can follow. He can consume 7 units of composite good and 6 units of Good X which makes a combination of IC1 and IC2 and forms PCC1 which is upward sloping. Another combination is consumption of 6 units of composite good and 8 units of Good X which makes a combination of IC1 and IC3 and forms PCC2 which is upward sloping.

Thus the statement made above is false as in both case PCC is upward sloping.

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