Explanation of the graphics figures upon budget Assignment

Explanation of the graphics figures upon reckon - Assignment ExampleThe cypher line implies that if Susan spent all her income on tog she would be fitted to procure OB units of it. If on the other hand, Susan spent all her income on forage, she would be able to purchase OA units of forage. If she allocates her income on both goods then all combinations of food and clothing she tramp meet are those on or within the line AB. Thus the triangle OAB defines the combinations of food and clothing attainable by Susan, condition her income and the prices of food and clothing. Assuming that Susan is rational, and the law of diminishing marginal good holds for both goods, and she has continuous and complete preferences, her preferences can be interpret by downward sloping convex indifference arcs. Susans objective is to attain the highest possible indifference curve within the reach of her cipher set. This is shown in figure 2. fingerbreadth 2 the benefit maximising choice in Ade laide As shown above in figure 2, given her budget constraint, Susans utility maximizing choice in Adelaide is point E. She consumes OC of food and OD of clothing and this generates the aim of utility denoted by the indifference curve IC1. Linda is aware that in Melbourne the prices of both goods are higher and that food is relatively more pricey than clothing compared to the situation in Adelaide. Therefore, with her present income (that she earns by working in Adelaide) Susan will be able to by lesser of both food and clothing. Additionally, because food is relatively more expensive, not only she will be able to buy less of food if she invests all her income in food compared to the bill of food she would be able to buy in Adelaide, the reduction in the amount of food she can buy will be more than the reduction in the amount of clothing she will be able to buy. What this implies is that i) her budget line will shrink inwards and ii) it will be relatively more flat compared to h er budget line in Adelaide. This is depicted in figure 3. Figure 3 FG - Susans budget line in Melbourne if her income remains equal to her Adelaide income In the diagram above, FG is Susans budget line in Melbourne if her income remains unchanged. Observe that not only can she buy fewer amounts of both products, the reduction in her capacity to purchase clothing had she chosen to invest all her income in clothing, depicted by the amount GB in the figure above, is less than the reduction in the amount of food she can buy if she invests all her income in food, AF. This is implied by the fact that food is relatively more expensive than clothing in Melbourne. Figure 4 Susans new budget set relative to her old favourite(a) bundle and utility take aim. Therefore, as reflected in figure 4, Susan can no longer access the utility level denoted by the indifference curve IC1 and nor can she afford the commodity bundle she preferred when she was in Adelaide. Therefore her real income will fa ll if she has to move to Melbourne but her income is still as it was back in Adelaide. Linda, if she has to make sure Susan accepts the offer, will have to pay her enough to ensure that her real income is at to the lowest degree as high as it is presently in Adelaide. There are two possible slipway of achieving this. I. If Susan is paid an income so that she can purchase a commodity bundle that places her again at the utility level IC1. This implies paying her an income over her present Adelaide income that will allow her to access her old indifference curve IC1. This would be what is termed as the Hicksian compensation. The idea is that Susan will be back at her old real income level if she has access to her old utility level. Figure 5 The Hicksian Compensation - PQ