March 29, 2017

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When the price of X is $1 and the price of Y is $1 and income is I, Joe Panther spends $100 on good X. One day Joe is walking down Downer street and is dismayed to discover that the price of good X has increased to $2. However, moments later Joe is delighted to find a $100 bill on the street. Use budget lines and indifference curves to answer the following question, leaving his unknown income as the variable I. Assume that he has normal convex shaped indifference curves and that he spends all of his income.

A)How many units of goods X and Y does Joe purchase before the price increase and finding the $100? Part of your answer will be in terms of prices and income.
B)After the price increase and finding the money can Joe still afford the same number of units of X and Y as in part A?
C)Is Joe better off, worse off, or just the same as before the price increase and finding the money? In other words, is utility higher in part A) or when Px=2 and income is I+100?

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