Chris has an income of $90 to allocate between Goods A and B. Initially, the price of A is $3 and the price of B is $4.
a. Draw Chris’s budget line, indicating its slope if units of A are measured on the horizontal axis and units of B are on the vertical axis.
b. Add an indifference curve to your graph and label the point of consumer equilibrium. Indicate Chris’s consumption level of A and B. Explain why this a consumer equilibrium. What can you say about Chris's total utility at this equilibrium?
c. Now suppose that the price of A rises to $4. Draw the new budget line, a new point of equilibrium, and the consumption level of Goods A and B. What is Chris’s marginal rate of substitution at the new equilibrium point?
d. Draw the demand curve for Good A, labeling the different price-quantity combinations determined in parts (b) and (c).