Jessica consumes two goods,XandY. The quantities ofXandYthat Jessica may consume are denoted byxandy, respectively. For bundles such that0.5x 2xis indierent to the bundle(x,2x). Suppose that

Jessica consumes two goods,XandY. The quantities ofXandYthat Jessica may consume are denoted byxandy, respectively. For bundles such that0.5x2x, then she only cares about the quantity ofX, the more of it, the better, but increasingyleaves her in the same indierence curve: any bundle(x, y)such thaty >2xis indierent to the bundle(x,2x).

Suppose that Jessica's income isM= 20and the prices ofXandYare, respectively,px= 4andpy= 2.

1. (a)Write the equation of Jessica's budget line. Setting the quantity ofXin the horizontal axis, graph Jessica's budget line. (5 marks)
2. (b)In a new graph, with the quantity ofXon the horizontal axis, draw the indierence curve that contains the bundle(x, y) = (6,3)and the indierence curve that contains the bundle(x, y) = (2,6). (5 marks)
3. (c)Find Jessica's optimal bundle. Draw a new graph and represent this bundle, the budget constraint, and the indierence curve containing this bundle. (5 marks)
4. (d)Suppose that the price ofYincreases topy= 5. Draw a new figure including everything you had in the graph of part (c), and add Jessica's new budget line and her new optimal bundle. Find the income eect and substitution eect forY. (5 marks)