Question

An individual consumes two goods, clothing and food. Given the information below, illustrate the income-consumption curve. Clothing Price $8.00 $8.00 $8.00 Food Price $8.00 $8.00 $8.00 Clothing Food Income 100 100 $1,600 200 200 $3,200 300 300 $4,800 1.) Using the line drawing tool, first draw a budget line when income is $1,600. Label this line 21 2.) Using the point drawing tool, add the corresponding satisfaction-maximizing bundle. Label this point 'A'. Carefully follow the instructions above, and only draw the required objects.

Answer 1

Solution-

Income consumption curve is the curve drawn by joining the equilibrium points of the consumer at various level of income.

Solution Clothing Food price Price = $8 = $8. 9 Mi = Pxx, + Pyy, 1600 = 8x, + 84. Corner points x=0, y = 1600 = 200 y = 0 x, = 1600 = 200. **-100 x 100 [optimal points of - Similarly, Clothing & Food 9M₂ = Px ₂ + Py Y₂ 3200 = 88₂ +842 Corner, R2 = 0, y = 3200 = 400 Y=0, x2 = 3200 = 400 X* = 200, y = 200 [optimal points of Also M3 = Pa Nat PyYz 4800= 8₂ +843 X₂=0, Y = 4800 = 600 x 3t = 300 13 = 300 93=0, z = 4800 = 600 optimal points. Points clothing & Food]

+6oof Food sso Price =$8 500 clothing ICC 450 Price = 18 400 Food 350 300 250 2005 1507 Clot 50 100 150 200 250 300 350 400 450 500 5so A( 100, 100), B1200, 200) c (300,300) where A, B and C are optimal Bundles. The line joining the equilibrium points at each income level, gives us the ICC ie; Income coonsumption curve.