Question

10. Deriving demand from an indifference map Beth lives in San Diego and enjoys drinking lattes and eating scones. The price of a latte is held constant at $4 throughout this problem. On the following graph, the purple curves (I and Is) represent two of Beth's indifference curves. The lines BC and BC, show two budget constraints. Points X and Y show Beth's optimum consumption bundles subject to these budget constraints. ? 20 18 16 14 12 LATTES 10 8 6 2 BC BC 0 0 2 4 6 14 16 18 20 8 10 12 SCONES

Answer 1

Lattes is measured on Y-axis

Scones is meaured on X-axis.

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Y-axis intercept of the Budget line = (income / Price of Lattes)

X-axis intercept of the Budget line = (Income / Price of Scones)

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Y-axis intercpet of BC1 = 18

=> (Income / Price of Lattes) = 18

=> (Income / $4) = 18

=> Income = $4 * 18

=> Income = $72

Berth's available income for lattes and scones is $72

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Optimal consumption occurs at the tangent point of Budget line and indifference curve.

When Budget line is BC1, then optimal consumption bundle occurs at point X.

Hence, 6 units of scones and 6 units of Lattes consumed at point X.

X-axis intercept of BC1 = 9

=> (Income / Price of Scones) = 9

=> ($72 / Price of scones) =9

=> Price of scones = ($72 /9)

=> Price of scones = $8

Thus, when price of scones is $8, then Berth is consuming 6 units of scones.

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When Budget line is BC2, then optimal consumption bundle occurs at point Y.

Hence, 12 units of scones and 6 units of Lattes consumed at point X.

X-axis intercept of BC1 = 18

=> (Income / Price of Scones) = 18

=> ($72 / Price of scones) =18

=> Price of scones = ($72 /18)

=> Price of scones = $4

Thus, when price of scones is $4, then Berth is consuming 12 units of scones.

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When Berth's budget constraint is	Price ($ per scones)	Consumption (Scones)
BC1	8	6
BC2	4	12

9 00 7 5 Price ($ per scones) Demand N 1 0 0 2 4 6 8 10 12 14 Quantity (Scoones)