A consumer spends all her income on goods x and y. Her income is 400. Prices of x and y are px =...


A consumer spends all her income on goods x and y. Her income is 400. Prices of x and y are px = 6 and py = 2. The preferences of the consumer are represented by U(x, y) = x3y, where x and y denote the quantities of the two goods that the consumer consumes, respectively. The corresponding marginal utilities are:

MUx = 3x2y and MUy = x3

a) Write down the consumer's budget constraint and illustrate it in a graph.

b) Calculate the consumer's optimal consumption bundle and show your answer in your graph.

c) Suppose that the consumer's income increases to 440. Write down the new budget constraint and calculate the new optimal consumption bundle. Draw these in your graph.

d) Define the concepts of income effect and substitution effect.

e) For good x, discuss and illustrate graphically the substitution effect and the income effect of the movement from the equilibrium in part (b) to the new equilibrium in part (c).

Consumer Preference:

Consumer preference or behavior refers to the set of combination which guides the consumer in choosing appropriate combination that maximizes consumer utility or satisfaction. Every consumer has its own set of preference that directly depends on his budget and utility.

Answer and Explanation: 1

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Given, two goods x and y

Consumer income is 400

Price of goods (px) id 6 and price of y goods (py) is 2

Consumer utility for (x and y) is U(x, y) =...

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Consumer Preferences & Choice in Economics


Chapter 3 / Lesson 9

Learn about consumer preferences in economics and understand the importance of the consumer choice theory - study examples of consumer preference assumptions.

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