Suppose the price of good X is Rs.5 and the price of good Y is Rs.10 and a household has Rs. 500 to spend per month on goods X and Y.
a. Sketch the household budget constraint.
b. Assume that the household splits its income equally between X and Y. Show where the household ends up on the budget constraint.
c. Suppose the household income doubles to Rs.1,000. Sketch the new budget constraint facing the household.
d. Suppose after the change the household spends Rs. 200 on Y and Rs. 800 on X. Does this imply that X is a normal or an inferior good? What about Y?
e. What is the income elasticity of demand for X and Y?