## Explain what is meant by the terms indifference curve, the marginal substitution fraction and the budget condition in consumer theory.

### economics

##### Description

A)     Explain what is meant by the terms indifference curve, the marginal substitution fraction and the budget condition in consumer theory.

B)      The benefit to a consumer depends on the benefits x1 and x2. Explain why the consumer's optimal choice of goods will not change if the prices of the two goods are doubled, if the income is also doubled at the same time

C)      A consumer has a utility function that depends on the benefits x1 and x2. The goods can be bought at fixed prices in the market, and the consumer has set aside a given amount to buy the goods. Show by a graphic reasoning which good combination the consumer will choose if the goal is to maximize the benefit. Specify the conditions that characterize the optimal good combination either verbally, or using equations.

Assume that the preference for a consumer can be expressed by the utility function

a)      Show that based on this utility function, the demand functions are the benefits given by

where p1 is the price per unit 1x, p2 is the price per unit x2 and m is revenue to the consumer.

b)      Explain what is meant by normal and inferior goods, and determine which of these properties characterizes each of the goods x1 and x2 in problem (a). Illustrate in a diagram with 1 on the vertical axis and x1 on the horizontal axis the effect on demand for x1 of an increase in consumer income you are not supposed to make an accurate drawing - a principle sketch is sufficient).

c)       Take as a starting point the demand functions given in task (a). Illustrate in a diagram with 2 on the vertical axis and x2 on the horizontal axis the effect on the demand for x2 of an increase in the price of good x1, and give a short comment

d)      Explain what is meant by the (direct) price elasticity of a good. Calculate this for the good x2 given in problem (a), and give an interpretation of the result.