Question

Question 3 a. Samantha earns a weekly income of $6000. Suppose she wishes to spend this income on two goods books and dresses only. A book costs $200 while a dress costs $600. i. Draw Samantha’s budget line. Putting books on the Y axis. [3 marks] ii. Suppose her income increases to $9000 per week, illustrate what happens to her budget line. [2 marks] iii. Suppose the price of books increase to $600, while her income and the price of dresses is unchanged. Illustrate what happens to her budget line.[2 marks] b. List and explain three properties of indifference curves. [3 marks] c. Explain the term marginal rate of substitution. [2 marks]

Answer 1

Y = Px Q x + PyQy $ 6000 = $200X30 + $600xo OR &6000 - Px Ox + $600x10 30 Books 10 2. Dress If income increases by to & 9ooo the new budget line g ooo = {2 oo Xча - Pү@y 2 9000 & 9000 - Pxox t 8 600x 15 New Budget Line 402 Books. 15 prets

3. Price of books to 4660 $6000 - 600x10 + PyQy Hold b,L, Books Newboni Press Properties of indifference curve b. Three
Three properties of indifference curve are

1. Two indifference curve can never intersects each other because consumer prefrences are monotonic.

2. Higher indifference curve shows heigher level of satisfation because a consumer can buy more goods

B. Indifference curve is covex to the origin because MRS falls

C.Marginal rate of substitution is the rate of substituting one commodity in terms of getting the units of another commodity. MRS falls because as soon as we have more and more units of one commodity our willingness to give up the other commodity would be less and less therefore MRS falls.

MRS = Px/PY or Change in QY/ Change in Qx