Initially the price of good X is 1 and the price of good Y i

Initially the price of good X is $1 and the price of good Y is $2.Income is $100 per unit of time.Income decreases from $100 per unit of time to $50 per unit of time.X is an inferior good.

What happens to the slope of the budget line?

Is there a substitution effect? If so, how is the utility maximizing quantity of good X affected?

What happens to the X-intercept of the budget line? (Be specific)

What happens to the Y-intercept of the budget line? (Be specific)

Is there an income effect? If so, how is the utility maximizing quantity of good X affected?

Accounting for both the income and substitution effects, how is the utility maximizing quantity of X affected?

Solution

A remains same because prices don\'t change

B There is no substitution effect because relative prices doesn\'t change

C it falls because less can be purchased with all income now

D it falls

E Yes there is income effect. Quantity of x utilized rises because it is an inferior good

F Again it rises as there is no substitution effect