Question

Maren is planning a cruise to the Caribbeans and has a budget for new evening wear of $500. She plans to purchase new shoes and dresses. The average price for a pair of shoes is $50 while the average price for an evening dress is $100. Her current budget constraint is pictured in the graph. Maren catches an end of season sale on dresses and the average price of dresses falls to $50. As a result:

a) The opportunity cost of each additional dress increases as a result of the price reduction.

b) Stephanie’s new budget constraint will be flatter.

c) Stephanie will be able to afford more dresses for a given number of shoes.

Answer 1

Initially the average price for an evening dress is $100 but due to end of season sale , the average cost of evening dress becomes $50.

So from this we can conclude that Maren will now have to pay less for the dresses she will buy, hence the opportunity cost of each additional dress will decrease as a result of price reduction.

In the budget constraint graph , if the dresses is on the y-axis and shoes on the x-axis , then the budget line will become steeper as Stephanie can now buy more number of dresses with same budget due to reduced prices.

Due to reduced prices, we can see that for a given number of shoes , Stephanie will now be able to afford more number of dresses as the price of dresses has reduced.

We can see this as suppose if she only buys 2 pairs of shoes , then with initial price she could only buy only 4 dresses but after the decrease in price she can buy 8 dresses.

So option C is the correct answer.