Question

i was doing this question and i got thr intercepts for the original budget line to = (8,0) snd (0,18) but the x intercepts seem to be different in the answer scheme shown in the picture? is this a mistske done by my professor or am i doing something wrong?

2 Quasilinear preferences Consider the utility function u (1,32) = In + 32. Suppose that the old situation is given by Pi = 2.25 and P2 = 1 and m = 18. Suppose that the new situation is given by Pi = 1 and 2 = 1 and m = 18. Derive the Slutsky decomposition and show it diagrammatically. Solution: Smoti Step 1: (cold, cold) 1. The budget line is 29 = 18 -2.2521 Since the optimal bundle is an interior point, the tangency condition is The budget line yields that MRS =- () = -2.25 = zote = zold = 18 -2 * = 17. Graphically: item2 207 1971 18 + sed dolo oli samalla Norad Downsman oodatult la bore logogodt now oldatotel ) bed lambo 17+ sonti ogni 16+ odbora nionda budod tobooth bollo O i 2 3 4 5 6 7 items Step 2: (new, ew) The budget line is 12 = 18 - Since the 11

Answer 1

You are right. The graph given is wrong. The original budget line equation= 18= 2.25x+y

The X intercept = (8,0)

As income/Price of x= 18/2.25= 8

The Y intercept= (0,18)

As Income/price of Y= 18/1= 18