The Problem of the Optimal Consumption Bundle solution
The Problem of the Optimal Consumption Bundle Note that you must design well-labeled graphs for this question. Please make the graph as large as possible so that all of the intricacies can be seen. Assume a typical customer is attempting to solve a limited optimization problem in order to determine her best consumption bundle. U = U (x, y) is the utility function, while Px and Py are the prices per unit of x and y, respectively.
The consumer’s allowance is denoted by M. The price of x will vary in each of the following scenarios, and you will be needed to make graphs for each of these examples to indicate the magnitude of the substitution effect, income effect, and overall price effect. Plot good x on the horizontal axis for all graphs. Assume that the good x is a normal good and that the price of x grows. Case b: Assume that the price of x has increased and that the good x is of worse quality. Case c: Assume that the good x is a Giffen good and that the price of x decreases. A Giffen good is inferior, yet the magnitude of the income effect is greater than the magnitude of the substitution effect for a Giffen good. Case d: Assume that the good x is a normal good and that the price of x decreases. The Problem of the Optimal Consumption Bundle