Consider a consumer who allocates her income m to the consumption of goods 1 and 2. Denote by pi the price of good i = 1, 2. The consumer’s preferences are such that there exists a bundle x = (x1, x2) such that for any bundle y = (y1, y2), y ƒ= x, we have x > y.
1. Does the consumer has monotone preferences over bundles of goods 1 and 2?
2. Suppose x = (5, 10), p1 = $1, p2 = $4, and m = 60. Can the consumer afford his favorite bundle, x? In a graph, draw the budget line and locate the bundle x.
3. Suppose p1 and p2 are as in (ii), but m = $100. Is the consumer better off after the increase in income?