How to draw these curves for a given income and costs? Please explain the method. A consumer has an income of £200 which can be spent either on Good X or on Good Y. Good X costs £20 per unit and Good Y costs £10 per unit. Good X is an inferior good and Good Y is a normal good. Read parts (i) to (iv) before answering: (i) Draw a budget line for the consumer. Label the quantities of Good X and Good Y at the points where the budget line meets the Good X and Good Y axes. (ii) Draw an indifference curve for Good X and Good Y at a point where the consumer is maximising satisfaction. Label the curve A, the quantity of X consumed as X1 and quantity of Y consumed as Y1. (iii) Show the effect on the budget line of an increase in the consumer's budget to £400. Label the quantities of Good X and Good Y at the points where the budget line meets the Good X and Good Y axes. (iv) Draw a new indifference curve for Good X and Good Y on the new £400 budget line at a point where the consumer is maximising his satisfaction. Label this new curve B, the quantity of X consumed as X2 and quantity of Y consumed as Y2.
Have you had a go at this yourself yet? If so, where did you get stuck? Starting with (i) for example - do you know what a budget line is? (The clue is in the name!) There are examples of how to draw this line already in the textbook.
I got stuck in the (ii) part. I'm a little confused about drawing an indifference curve. Should i draw it randomly where it touches the budget line at one point or are there any calculations for drawing this curve( making an indifference set and then drawing it).
You aren't given information about the specifics of utility for the consumer so you should just sketch an indifference curve, no need to do any maths to work out an equation or the like. You should draw a convex curve because of diminishing marginal utility. As for whether it should touch the budget line or not - the question says to draw it and label a point at which the consumer maximises satisfaction. This should tell you 'which' indifference curve to draw and how it will touch or intersect or not touch the budget line.
