DSE 2004 Question 13: Budget constraint and consumer equilibrium
Consider a person who consumes water and bread, deriving utility xy if x is the amount of water and y is the amount of bread. Income is Rs. 10, the unit price of bread is Rs. 3 and the unit price of water facing this person is Re. 1. The water price incorporates a per-unit subsidy of Re. 1 (the person pays Re. 1 and the government pays Re. 1 to the supplier). This person's demand is (x0,y0). Suppose the water subsidy is removed and she has to pay Rs. 2 for each unit of water; let (x1,y1) be the new demand. What is the change (x1−x0,y1−y0)?
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Consider a person who consumes water and bread, deriving utility xy if x is the amount of water and y is the amount of bread. Income is Rs. 10, the unit price of bread is Rs. 3 and the unit price of water facing this person is Re. 1. The water price incorporates a per-unit subsidy of Re. 1 (the person pays Re. 1 and the government pays Re. 1 to the supplier). This person's demand is (x₀,y₀). Suppose the water subsidy is removed and she has to pay Rs. 2 for each unit of water; let (x₁,y₁) be the new demand. What is the change (x₁-x₀, y₁-y₀)? (A) (-5/2,0) (B) (-5/2,10/9) (C) (-10/3,10/9) (D) (-10/3,0)
Also written as: Consider a person who consumes water and bread, deriving utility xy if x is the amount of water and y is the amount of bread. Income is Rs. 10, the unit price of bread is Rs. 3 and the unit price of water facing this person is Re. 1. The water price incorporates a per-unit subsidy of Re. 1 (the person pays Re. 1 and the government pays Re. 1 to the supplier). This person's demand is (x_0,y_0). Suppose the water subsidy is removed and she has to pay Rs. 2 for each unit of water; let (x_1,y_1) be the new demand. What is the change (x_1-x_0, y_1-y_0)?
Budget constraint and consumer equilibrium has come up 99 times in 7 exams since 2004.
What this question tests
This question is on Utility maximisation and the interior optimum, part of Budget constraint and consumer equilibrium in Microeconomics.
Choosing the best affordable bundle where an indifference curve is tangent to the budget line, including Cobb-Douglas demand.
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