Ravi has £21 to spend on pastries and biscuits. If he spends all the money on pastries, he can afford 15 pastries. The slope of Ravi's budget line (assuming his pastries consumption is measured on the horizontal axis and his biscuits consumption is measured on the vertical axis) is -3.5 (3.5 in absolute terms). a) Calculate the price of a pastry and the price of a biscuit. Write down Ravi's budget equation and draw the corresponding budget line. Mark the consumption bundle mentioned above. In your graph, clearly label the axes, the budget line, and calculate the coordinates of the points of intersection of the budget line with each axis. Interpret each of those points. b) Discuss how Ravi's budget set would change if his budget doubles. Show the relevant changes graphically. How could the price of a pastry increase so that Ravi could still afford to buy 15 pastries? c) Discuss how Ravi's budget constraint would change if the government imposed a tax of £0.50 per pastry and £0.50 per biscuit.

Ravi has £21 to spend on pastries and biscuits. If he spends all the money on pastries, he can afford 15 pastries. The slope of Ravi's budget line (assuming his pastries consumption is measured on the horizontal axis and his biscuits consumption is measured on the vertical axis) is -3.5 (3.5 in absolute terms). a) Calculate the price of a pastry and the price of a biscuit. Write down Ravi's budget equation and draw the corresponding budget line. Mark the consumption bundle mentioned above. In your graph, clearly label the axes, the budget line, and calculate the coordinates of the points of intersection of the budget line with each axis. Interpret each of those points. b) Discuss how Ravi's budget set would change if his budget doubles. Show the relevant changes graphically. How could the price of a pastry increase so that Ravi could still afford to buy 15 pastries? c) Discuss how Ravi's budget constraint would change if the government imposed a tax of £0.50 per pastry and £0.50 per biscuit.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Revealed Preferences and Budget Constraint Analysis

Revealed means “Let Out,” and Preference means “Choice”; Choice Reveals Preference.

Question

Ravi has £21 to spend on pastries and biscuits. If he spends all the money on pastries, he
can afford 15 pastries. The slope of Ravi's budget line (assuming his pastries consumption
is measured on the horizontal axis and his biscuits consumption is measured on the
vertical axis) is -3.5 (3.5 in absolute terms).
a) Calculate the price of a pastry and the price of a biscuit. Write down Ravi's budget
equation and draw the corresponding budget line. Mark the consumption bundle
mentioned above. In your graph, clearly label the axes, the budget line, and
calculate the coordinates of the points of intersection of the budget line with each
axis. Interpret each of those points.
b) Discuss how Ravi's budget set would change if his budget doubles. Show the
relevant changes graphically. How could the price of a pastry increase so that Ravi
could still afford to buy 15 pastries?
c) Discuss how Ravi's budget constraint would change if the government imposed a
tax of £0.50 per pastry and £0.50 per biscuit.

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