Question 2 [19 marks] You are provided with the following information: M = R1000, Px = R100 and Py = R125. At the outset, the consumer purchases 5 units of X. Subsequently, the price of Y decreases to R80 per unit. Answer the following questions: a) Draw the initial point of equilibrium on a diagram, showing the budget line and the indifference curve. Call this point of equilibrium point A. [Hint: ensure that the diagram is large and ensure that you have quite a bit of space on the Y-axis above the intersection with the budget line.] [4] b) How many units of product Y will be purchased at point A? [1] c) Indicate the new budget line on the same set of axes as drawn in part (a). Draw the new indifference curve such that the new equilibrium is where the consumer purchases 6 units of X. Call this new point of equilibrium point D. [3] d) At point D, how many units of product Y will be consumed? [1] e) Using the diagram used previously, show and explain how the increase in the consumption of product X can be broken into an income and substitution effect. Call the point of tangency of the "compensated" budget line and the appropriate indifference curve point E [5] f) Using the same diagram, show how the change in the consumption of product Y can also be broken into an income effect and a substitution effect. [3] g) For product X, the substitution effect resulted in a decrease in its consumption, while for product Y the substitution effect resulted in an increase in its consumption. Why is this the case ? [2] Question 3 [9 marks] You are provided with the diagram below. It shows the relationship between the amount of consumption (in rands per day) and the daily hours of free time. Answer the questions below. Consumption 1200 BL1 800 ICZ Y1 Ci 15 24 Hours of free time