Chapter 5A, Problem 1TY

To determine

(a)

To draw the budget lines of Mr. J in three different scenarios.

Explanation of Solution

A budget line is a graphical representation of all the possible combinations of goods and services which can be purchased with given income and prices. The total money income of the consumer equals the total cost in purchase of goods and services.

Budget Line is denoted by the equation:

   ${\text{P}}_{\text{X}}{\text{X+P}}_{\text{Y}}\text{Y=M}$

Where, ${\text{P}}_{\text{X}}$ is the price of good X, ${\text{P}}_{\text{Y}}$ is the price of good Y and M is the money income.

The income of consumer is $100, and the prices of both goods are $2 each. So, the consumer can purchase 50 units of tacos and no hot dogs, 50 units of hot dogs and no tacos or any other feasible combination.

The figure below shows the budget line of this consumer:

To determine

(b)

To draw the budget lines of Mr. J in three different scenarios.

Explanation of Solution

The income of consumer changes to $150 with no change in prices. So, the consumer can now purchase 75 units of either good with no unit of the other good or any other feasible combination.

The figure below shows the budget line of this consumer:

To determine

(c)

To draw the budget lines of Mr. J in three different scenarios.

Explanation of Solution

The income of the consumer is $100, and price of tacos is $2.50 per unit whereas the price of hot dogs is $2 per unit.

So, the consumer can either purchase 40 units of tacos and no other good, 50 units of hot dogs and no other goods or any other feasible combination of both.

The figure below shows the budget line of this consumer: