Assume a consumer spends all his income in the purchase of two goods X and Y
whose prices are Sh. 30 and Sh. 20 per unit respectively. The consumer’s monthly
income is Sh. 12,000. He is satisfied with various combinations of X and Y but
prefers to spend his income in equal proportions on the two commodities, that is, at
a ratio of 1:1 to maintain his level of satisfaction.
Required:
(a) Using clearly labeled diagrams:
(i) Show the relevant budget line and indifference curves indicating the
equilibrium position of the consumer.
(6 marks)
(ii) What is the effect of an increase in the consumers income from Sh. 12,000
to sh. 24,000 per
month?
(4 marks)

(b) (i) Differentiate between inferior and giffen goods.
(2 marks)
(ii) Using separate diagrams, illustrate and explain the substitution and
income effects of a price
fall for both inferior and giffen goods
(8 marks)