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Im having a hard time drawing problem 1. I don't understand how to draw out the year 1 and the year 2 budget constraints and
Im having a hard time drawing problem 1. I don't understand how to draw out the year 1 and the year 2 budget constraints and indifference curves going through the bundle (q1,q2)= 6,4 Question 1) Suppose you consume goods 1 and 2 and no other goods. In addition, assume that your indifference curves over bundles of goods #1 and #2 exhibit strictly diminishing marginal rates of substitution (that is, the indifference curves are convex). In year 1, assume that your income is $10 ( = $10) and the price of good #1 and the price of good #2 are both $1 (1 = 2 = $1). During year 1, you choose to purchase 6 units of good #1 (1 = 6) and 4 units of good #2 (2 = 4). Suppose during the next year, year 2, the price of good #1 goes up to $2.50 (1 = $2.50) and the price of good #2 goes up to $1.25 (2 = $1.25). Also, assume your income went up during year #2 - now = $20. If we assume that you don't save or borrow (so you spend all of your income during the year you earn it) and we assume that your preferences don't changes across years, when are you happier - year 1 or year 2? That is, which year will you reach a higher level of utility given your consumption of good #1 and good #2? (Hint: draw the budget constraints and an indifference curve going through the bundle (1, 2) = (6,4).)
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