Suppose a consumer has a monthly income of m = 100 which she spends on two commodities: french fries (x1) and beef jerky (x2). The price of french fries is p1 = 2 and the price of beef jerky is p2 = 5. (e) What is the slope of the budget line? Provide an economic interpretation of this number. (f) Because of Mad Cow Disease, the price of beef jerky increases to $10 (lower supply of beef). On a new graph, plot the original and new budget constraint clearly identifying how the budget constraint has changed. What is the new relative price of beef jerky in terms of french fries? (g) Because of severe shortages, Congress passes the Jerky Relief Act which limits each consumer to purchase at most 5 packs of jerky. Show on a graph how this affects the consumer’s budget set. Answer all three.
Suppose a consumer has a monthly income of m = 100 which she spends
on two commodities: french fries (x1) and beef jerky (x2). The
french fries is p1 = 2 and the price of beef jerky is p2 = 5.
(e) What is the slope of the budget line? Provide an economic
interpretation of this number.
(f) Because of Mad Cow Disease, the price of beef jerky increases
to $10 (lower supply of beef). On a new graph, plot the original
and new budget constraint clearly identifying how the budget
constraint has changed. What is the new relative price of beef
jerky in terms of french fries?
(g) Because of severe shortages, Congress passes the Jerky Relief
Act which limits each consumer to purchase at most 5 packs of
jerky. Show on a graph how this affects the consumer’s budget
set.
Answer all three.
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