Hey there, I am having a tough time doing this exercise if you could help, that would be great thanks

Suppose that the following graph represents the optimal consumption bundle of a typical consumer, with an income of 80, facing prices PX = 1 and PY = 1 and with utility U=XY.

(a) Now, let income remain fixed let prices rise so that PX = 2; PY = 4. Illustrate the new budget line and draw a sample indifference curve to show the new equilibrium bundle.

(b) Let income be indexed to the cost of living so that the budget line shifts out just enough that the old bundle (at the original prices, above) is just affordable. In other words, let income increase to 240. Is the old bundle still the optimal choice at the new income level and new prices? Has utility increased above that of the original consumption bundle? Explain

using a diagram.

(c) Suppose that prices are now PX = 2; PY = 2, and income has increased to 160 (so that both income and prices have exactly doubled over the original levels). Is the old bundle optimal now? Has utility increased above that of the original consumption bundle?

1. Suppose that the following graph represents the optimal consumption bundle of a typical con- sumer, with an income of 80, facing prices Px = 1 and Py = 1 and with utility U=XY. Y 80 40 10 80