Suppose that the price of commodity Y is $1 per unit while the price of commodity X is $2 per unit and suppose that an individual’s money income is $16 per time period and is all spent on X and Y.

(a) Find the specific equation of the budget constraint line and calculate the slope of the budget line. (b) Draw the budget line on the Figure 1 and find the utility maximizing value of X and Y. Explain why this is an equilibrium point. 12- 10- Figure 1 11 111 (c) Now suppose that the price of X falls from $2 to $1. Find the new equilibrium point and draw the demand curve the commodity X. (d) Split the price effect resulting from the reduction in the price of X from $2 to $1 per unit (ceteris paribus). (e) Draw the compensated demand curve. (f) Determine the price elasticity of demand over this price range for both the demand curves (demand curve drawn in 'c' and 'e') and interpret the results.