Question

I have partial answers for some of them, but not confident at all in them

2) Consider two consumers, Tom and Robert, choosing between goods 1 and 2. Both have the same income of $60 (M=60) and the prices of goods 1 and 2 are P S10 and P = $7.5. Their initial budgets and indifference curves are below. Robert Tom Good 2 Good 2 P = 10 P2=13.3 NWU ON 1 2 3 4 5 6 7 8 9 10 11 12 13 Good 1 1 2 3 4 5 6 7 8 9 10 11 12 13 Good 1 a) What do the shape of the indifference curves tell us about the relative preferences for good 1 and good 2 for each consumer. (2 points) The shape of the indifference curve tells us that Robert isn't very willing to substitute good one for good two, While Tom is pretty willing to substitute good one for good two b) Demonstrate on the graphs above how the optimal decisions of both change if their incomes increase to $100 (M = $100). Discuss (2 points) up

Answer 1

• a) answer is correct.
• b) answer is correct.
• c) rotation of budget line for first case is correct. see the graph attached for second part. Indifference curve 1 (IC1) shifts to indifferencr curve 2 (IC2). So, new optimum changes to new point of tangency at B. Higher indifference curve (IC2)is tangent to pivoted budget line BC2 at B
  Robert Good 2 Πν ICY Bc می Good 1
  .