Question

1) You make $2,000 a month. You can spend this income on two goods: food, which costs $10 a unit; and "all other goods" which costs $5 a unit. a) Draw your budget constraint for a given month in a graph. Be sure to label all relevant points (y-intercept, x-intercept and slope) on the graph with their values. b) Shade in the area that you could possibly choose given your budget. Write a few sentences explaining why that area is shaded and other areas on the graph are not. c) Now, you get a raise so that your income is $2,500 a month. On a new graph, draw this new budget constraint. Again, be sure to label all relevant points on the constraint with their values. How does this increase in income affect the area you could possibly choose given your budget? d) You are very pleased with your raise, but all of the sudden the price of food goes up to $15 per unit. On a new graph, draw this new budget constraint that takes into account this price change. Again, be sure to label all relevant points on the constraint with their values. How does this increase in price affect the area you could possibly choose given your budget?

Answer 1

81 Total Income = $2000 Food=$10 ; All other goods = $5. a) The Budget Line equation : - Yo x + 5 Y = 2000 7 10x + 5Y-1 I shall take shape si 2000 2000 kas 10x +57 3 2000) ) + = 1. OUUOO S Budget lonstraint 00 ADO Prices of XaY other Goods 4000 1 slope = Px = 10 = ? SiIt is negativdy? - - 2006 . to - BUDGET LINE .: )O 200 400 food 6 The shaded portion as well as all the points on budget Line itsey constitute all the points which are feasible flan he chosen on giren Budget . When a point left of Budget Line, Eg. Point & is chorzen, the income Budget is not efficiently used, but still it is a combination that can he hought.

When a combination is chomen, which dies on Budgiet Line. Eq, Point Ċ, there gull utilisation of Budget f consumer Choose the combination But, when a combination of Good x 4 Goody represented by Point D is choven, it is not a feasible point ( ever Un attainable ) with the given u dget. © Raise of Income to new Income = $2500, fo, New Budget, hall look like :- 10x + 5y = 2500 S Budget constraint Swill still however > Llook like 10x+5Y < 2500 SY 10 x 2500 => to tas e = 1 Brices of X&Y 250 All bon slope = lx = 10 = 2 400 other Goods NEW BUDGET LINE 200 200 250 400 500 food

22 - The dotted Line represents the previous Budgu Line, With increase in Budget or Income to $2500 eve see that there has been rightward shift in Budget Line, Due to this, the feasible or attainable region of combination has in Oreased, So, the increase in Income has increased the wia one could possibly chome given budget. Price of food rises to $15 per unit. So, there will be change in budget line :- 15 x + 5y = 2500 25 15X+ 5Y - I 2500 2500 x + 7 = 1 d 3 - 166.66 15,3. 5 bo & slope of budget 400 du other items I line is rative 1 negaty 250+ NEW " BUDGET LINE 200 X 0 166 200 250 400 500 I food.

less units Due to increase in Price of food, with the same amount of Budget , less un of food will he hought while the units of "all other goods" "shall remain unchanged. The area that ca could be possibly choren given the budget has decreased. This has been dearly illustrated ly the dotted lines representing prerious Budget Lines of 8 @4 ©). The shaded portion now again represents the combinations of Good = X & food} f Good-Y Call other items} that can we choosen. due to in orase in Price , the area of choice, given budget, has rednad. Budget has rotated clock wise.