Marcus is a second year business student and has two options for meals: dining at university for £6 per meal, or eating a meal deal offered at a supermarket for £1.50 per meal. His weekly food budget is £60. a) Draw the budget constraint showing the trade-off between university meal and pre- packaged supermarket meal. Assume that Marcus spends equal amounts on the goods. Draw an indifference curve showing the optimum choice. Label the optimum as point A. Draw supermarket meal on the vertical axis. b) The price of the supermarket meal deal rises to £2. Assume that Marcus now spends only 30% of his income on university meals. Show the consequences of the changes using the graph in part (a). Label the new optimum as point (b). c) Comment on the result in part (b). What does this result say about the income and substitution effects? Explain. d) Calculate and compare the relative prices (i.e., opportunity cost) of supermarket meals and university meals before and after the price change. Explain how the price change affects the relative prices of the two meals.
Marcus is a second year business student and has two options for meals: dining at university for £6 per meal, or eating a meal deal offered at a supermarket for £1.50 per meal. His weekly food budget is £60. a) Draw the budget constraint showing the trade-off between university meal and pre- packaged supermarket meal. Assume that Marcus spends equal amounts on the goods. Draw an indifference curve showing the optimum choice. Label the optimum as point A. Draw supermarket meal on the vertical axis. b) The price of the supermarket meal deal rises to £2. Assume that Marcus now spends only 30% of his income on university meals. Show the consequences of the changes using the graph in part (a). Label the new optimum as point (b). c) Comment on the result in part (b). What does this result say about the income and substitution effects? Explain. d) Calculate and compare the relative prices (i.e., opportunity cost) of supermarket meals and university meals before and after the price change. Explain how the price change affects the relative prices of the two meals.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 1
Marcus is a second year business student and has two options for meals: dining at university for
£6 per meal, or eating a meal deal offered at a supermarket for £1.50 per meal. His weekly food
budget is £60.
a) Draw the budget constraint showing the trade-off between university meal and pre-
packaged supermarket meal. Assume that Marcus spends equal amounts on the goods.
Draw an indifference curve showing the optimum choice. Label the optimum as point A.
Draw supermarket meal on the vertical axis.
b) The price of the supermarket meal deal rises to £2. Assume that Marcus now spends only
30% of his income on university meals. Show the consequences of the changes using the
graph in part (a). Label the new optimum as point (b).
c) Comment on the result in part (b). What does this result say about the income and
substitution effects? Explain.
d) Calculate and compare the relative prices (i.e., opportunity cost) of supermarket meals and
university meals before and after the price change. Explain how the price change affects
the relative prices of the two meals.
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