Principles of Economics, 7th Edition (MindTap Course List)
Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
Book Icon
Chapter 21, Problem 1QR
To determine

The budget constraint of the consumer.

Expert Solution & Answer
Check Mark

Explanation of Solution

The budget constraint is the constraint which is due to the budget of the individual. The human wants and needs are unlimited and when the budget of the individual is not unlimited, it will lead to the constraint of needs and this constraint raised due to the limited budget is known as the budget constraint of the individual. Thus, a budget constraint will represent all the possible combinations of two commodities that an individual can consume at the given market prices and with all his income in hand.

Here, the income of the person is given as $3,000, the price of per glass wine is $3 and the price of cheese is $6. Thus, when the consumer spends her entire income on the purchase of cheese, the quantity that she can receive can be calculated by dividing the income with per pound price as follows:

QuantityCheese received=IncomePer pound price=3,0006=500

Thus, when she spends all her income on cheese, she can buy 500 pounds of cheese. When she spends all her income on the wine, the quantity can be calculated by replacing the price of cheese with that of wine as follows:

QuantityWine received=IncomePer glass price=3,0003=1,000

Thus, when she spends all her income on wine, she can receive 1,000 glasses of wine.

The budget constraint represents all the combinations of these two goods ranging between 500 pounds of cheese and no wine to no cheese and 1,000 glasses of wine. The vertical axis represents wine and the horizontal represents cheese on our diagram. The 500 pounds of cheese and no wine point represent the horizontal intercept and the no cheese and 1,000 glasses of wine represent the vertical intercept. The budget constraint can be drawn as follows:

Principles of Economics, 7th Edition (MindTap Course List), Chapter 21, Problem 1QR

The slope of the budget constraint is the rise over the run. It can be calculated by dividing the negative vertical intercept (represented by –b) by the horizontal intercept (represented by a) as follows:

Slope of Budget constraint=ba=Quantity of WineQuantity of Cheese=1,000500=2

Thus, the slope of the budget constraint is -2.

Economics Concept Introduction

Concept introduction:

Budget constraint: It represents all the combinations of two goods that the consumer can consume with the given price level and the income in the hands of the individual.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Explain how the introduction of egg replacers and plant-based egg products will impact the bakery industry. Provide a graphical representation.
Explain Professor Frederick's "cognitive reflection" test.
11:44 Fri Apr 4 Would+You+Take+the+Bird+in+the+Hand Would You Take the Bird in the Hand, or a 75% Chance at the Two in the Bush? BY VIRGINIA POSTREL WOULD you rather have $1,000 for sure or a 90 percent chance of $5,000? A guaranteed $1,000 or a 75 percent chance of $4,000? In economic theory, questions like these have no right or wrong answers. Even if a gamble is mathematically more valuable a 75 percent chance of $4,000 has an expected value of $3,000, for instance someone may still prefer a sure thing. People have different tastes for risk, just as they have different tastes for ice cream or paint colors. The same is true for waiting: Would you rather have $400 now or $100 every year for 10 years? How about $3,400 this month or $3,800 next month? Different people will answer differently. Economists generally accept those differences without further explanation, while decision researchers tend to focus on average behavior. In decision research, individual differences "are regarded…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Principles of Microeconomics
Economics
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Principles of Microeconomics (MindTap Course List)
Economics
ISBN:9781305971493
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Micro Economics For Today
Economics
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Cengage,
Text book image
Economics For Today
Economics
ISBN:9781337613040
Author:Tucker
Publisher:Cengage Learning
Text book image
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Text book image
Microeconomics
Economics
ISBN:9781337617406
Author:Roger A. Arnold
Publisher:Cengage Learning