Question

6. Suppose prices are given by pı 2 and p2 -4. Which of the following consumption patterns are consistent with the assumption that the consumer chooses the consumption bundle that he prefers the most among those affordable if his preferences are non-satiated ("more-is-better") and strictly convex? (a) If m 10, he consumes (2,1). If m 14, he consumes (3,2) (b) If m = 12, he consumes (c) If m 12, he consumes (2,2) (d) If m 10, he consumes (1,2). If m- 16, he consumes (2,3) If m- 18, he consumes (1,4). he consumes (1,1) (2,2). . If m 18,

Answer 1

For option a when m=10, consumption bundle is (2,1) which costs only 8, so a better bundle can be obtained as the income is not utilised fully.

For option b, we can see that as the income increases from 12 to 18, consumption bundle changes from (2,2) to (1,4). We do not that the utility has increased or decreased with the increase in income because the quantity demanded of the first good has decreased. So we cannot certainly say whether the utility has increased or decreased.

For option c , as the income increases from 12 to 18 , the goods basket becomes smaller from (2,2) to (1,1). This shows that money is not fully used and better consumption bundles can be chosen with an income of 18. It can also be seen that the utility has decreased inspite of an increase in income.

For option d,all the conditions are fulfilled , the consumption patterns are consistent with assumptions.