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Komalavalli · Accepted Answer

Question 1:
I won’t agree with the given statement because a decrease in price of normal will lead to increase in consumption quantity of goods. We will discuss this by using below diagram.
Before price decrease of a product the consumer will consume Q1 amount of Product B
Substitution effect: decrease in price of goods led to lower the opportunity cost of product B. This will induce consumer to buy more good from Q1 to Q3.
 Income effect: decrease in price of goods led to increase consumer real income, he/she can purchase more amount. Let us assume in above diagram product B is normal good. If price of normal good decreases consumers real income increase, so budget line will pivot outward and the quantity of product B consumption will increase from Q3 to Q2.After the decrease in price of Product B leads to increase in quantity of consumption from Q1 to Q2.
Question 2:
Based on the income and substitution effect decrease in price of food and clothing will lead to increase the consumption of both goods food and clothing.
Question 3:
a)
	
	Product Y
	
	Quantity
	Utility 
	Marginal Utility
	1
	14
	-
	2
	26
	12
	3
	36
	10
	4
	44
	8
	5
	50
	6
	6
	54
	4
	7
	56.4
	2
	
	Product Z
	
	Quantity
	Utility 
	Marginal Utility
	1
	32
	-
	2
	60
	28
	3
	84
	24
	4
	100
	16
	5
	110
	10
	6
	116
	6
	7
	120
	4
b) 
Utility maximization condition
MUx/Px = MUy/Py = MUz/Pz 
The column maximization rule indicates the calculation of MU/P
	 
	Product X
	 
	 
	 
	 
	 MUx
	 MUx/Px
	Quantity
	Utility 
	Marginal Utility
	MU max rule
	1
	42
	-
	 
	2
	82
	40
	           4.0 
	3
	118
	36
	           3.6 
	4
	148
	30
	           3.0 
	5
	170
	22
	           2.2 
	6
	182
	12
	           1.

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