Asked by Elisa Otero on Jun 13, 2024
Verified
George has a fixed income and can afford at most 7 units of X if he spends his entire income on X. Alternatively, if he spends all his income on Y, he can afford at most 6 units of Y. Draw George's budget line and an indifference curve such that George chooses to buy 4 pieces of X. Martha has the same income and faces the same prices, yet she chooses to buy 2 pieces of X. In equilibrium, what is George's subjective value of X in terms of Y? What is Martha's?
Budget Line
A depiction in graphic form of every achievable combination of two commodities that can be acquired based on a specified financial capacity and pricing.
Indifference Curve
An economic graph representing combinations of goods that give a consumer equal satisfaction and utility.
Subjective Value
The individual and personal valuation of a good or service rather than its market value, based on personal preferences, needs, or satisfaction derived.
- Absorb the essence of indifference curves, budget limits, and their significance in the optimization of consumer preferences.
Verified Answer
LB
Lolita BridgesJun 16, 2024
Final Answer :
In equilibrium, one unit of X will be worth 6/7 units of Y for both George and Martha. The reason is that each consumer choices a consumption bundle so that MRS is equal to the price ratio. 
Learning Objectives
- Absorb the essence of indifference curves, budget limits, and their significance in the optimization of consumer preferences.