The price of good X is $2.00 and the price of good Y is $1.00. Last year, the price of good X was $1.00 and the price of good Y was $2.00. If a consumer has $100, draw there their budget line for each year (label them accordingly). Add as many indifference curves as needed to show a situation in which the consumer is no better or worse off this year than they were last year. Be sure to label their optimal baskets for both years. Explain why what you have drawn is correct.

Question

What will be an ideal response?

Answer 1

The X and Y intercept for last year are 100 and 50 respectively. This year the X and Y intercepts are 50 and 100 respectively. Hence, the two budget line cross. For the consumer to be equally well off in each year, only one indifference curve is necessary. It must be drawn such that it is tangent to the highest section of each budget line. But be careful, the optimal baskets must be different. some students try to force the optimal point to be at the intersection of the budget lines. However, it is impossible for the same curve to be tangent to two different lines a the same point.