Question

 1. An individual's budget 

Suppose Yakov has a weekly budget of $48 to spend on coffee and yogurt. Coffee is priced at $4 per cup, and yogurt is priced at $6 per container. 

If Yakov spends his entire $48 on coffee, he can buy _______  cups of coffee. If he spends his entire $48 on yogurt, he can buy _______  containers of yogurt. 

Use the blue line (circle symbol) to plot Yakov's budget constraint on the following graph. Next, use the orange point (square symbol) to shade the area that represents combinations of coffee and yogurt that are affordable for Yakov. Finally, place the black point (plus symbol) on the point on Yakov's budget constraint that corresponds to a scenario in which Yakov spends $24 on each good. 

Note: Dashed drop lines will automatically extend to both axes.

What does the slope of Yakov's budget constraint represent? 

• The cost of an additional container of yogurt in terms of dollars. 

• The cost of an additional cup of coffee in terms of dollars. 

• The opportunity cost of an additional container of yogurt in terms of cups of coffee. 

• The opportunity cost of an additional cup of coffee in terms of containers of yogurt 

Suppose Yakov receives $24 from his grandmother and decides to dedicate this money to buying more coffee and yogurt. 

Using the green line (triangle symbol), draw Yakov's new budget constraint on the preceding graph. 

True or False: Yakov faces the same tradeoff between coffee and yogurt. 

Answer 1

Given, Price of Coffee = $ 4 per cup

and, Price of Yogurt =  $ 6 per container

&, Total money income = $ 48

So,  Budget constraint equation :-

Px . Qx + Py . Qy = m

Where:

m =  money income allocated to consumption (after saving and borrowing)

Px =  the price of a specific good [say, Coffee (cups)]

Py =  the price of all other goods [say, Yogurt (container)]

Qx  = amount purchased of a specific good [say, Qty. purchased of Coffee (cups)]

Qy =  amount purchased of all other goods [say, Qty. purchased of Yogurt (container)]

ATQ,

the required budget constraint equation :- 4 . Qx + 6 . Qy = 48.................................................. (1)

If Yakov spends his entire $ 48 on Coffee, then, Qy = 0.

So, Qx = $ 48 / $ 4 = 12 cups of Coffee

If Yakov spends his entire $ 48 on Yogurt, then, Qx = 0.

So, Qy = $ 48 / $ 6 = 8 containers of Yogurt.

And, choices beyond the budget constraint are not affordable and region towards left to the budget constraint to till origin represents affordable region means expenditure is less than income (represented by orange shaded region in below explained diagram).

Qty. of Yogurt (containers) 12 Slope of Budget Constraint = (-) Px / Py 00 8 Affordable region 4 $ 24 on Each) New Budget Constraint 0 6 12 18 Qty. of Coffee (cups)

The slope of the budget constraint is determined by the relative price of the good x and good y. The slope of a budget constraint always shows the opportunity cost of the good x in terms of good y. Therefore, Option (iv). is correct which means the slope of Yakov's budget constraint represents the opportunity cost of an additional cup of Coffee (good x) in terms of containers of Yogurt (good y).