ScholarMatic: Explanation & Answer
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4. (12 total points)Suppose a consumer’s utility function is given by U(X,Y) = X2*Y. The Price of Y is
PY = 3, and the consumer has M = $18 to spend.
a) (8 points) Draw the Price Consumption Curve for the following values of PX: PX = ]; Px = 2; P)( = 3. Be sure to label your graph carefully and accurately. You do not need to draw the indifference curves that
run through each of the consumer’s optimal bundles, but your graph should include accurately drawn
budget constraints associated with each level of income, and show the consumer’s optimal bundle for
each budget constraint.
run through each of the consumer’s optimal bundles, but your graph should include accurately drawn
budget constraints associated with each level of income, and show the consumer’s optimal bundle for
each budget constraint.
All of the budget constraints should have a vertical intercept (Y-axis) of 6.
When Px = $1, the horizontal intercept (X—axis) should be 18, and the bundle chosen is
(X = 12, Y = 2).
(X = 12, Y = 2).
When PX = $2, the horizontal intercept (X—axis) should be 9, and the bundle chosen is
(X = 6, Y = 2).
(X = 6, Y = 2).
When PX = $3, the horizontal intercept (X-axis) should be 6, and the bundle chosen is (X =
4, Y = 2).
4, Y = 2).
ScholarMatic: Explanation & Answer
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