Questions for Economics 1
BUDGET CONSTRAINTS
1.Every morning Professor Gordon buys a bagel and a cup of coffee from Peabody’s. At Peabody’s the price of bagels is $2.00 and the price of a cup of coffee is $1.00. a.Assuming that Professor Gordon has $20 to spend on coffee and bagels, sketch her budget constraint, putting coffee on the x-axis and bagels on the y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. b.Now, suppose that Peabody’s wants to encourage customer loyalty. To do so they start the following program: every time someone purchases 10 cups of coffee, they get the 11thcup for free. Sketch Professor Gordon’s new budget constraint under the assumption that she still has $20 to spend on coffee. As above, put coffee on the x-axis and bagels on the y-axis. Clearly label a) the x-intercept, b) the y-intercept, c) and the slope of the budget constraint. In addition, if there are any changes in the slope of the budget constraint, clearly identify the coordinates (i.e. the points) where those changes occur.