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Unformatted text preview: Add this budget constraint to your graph. Prices remain (1,1). The new budget line is the dashed blue line on the graph 2. Forgetful Frank spends all his money on hamburgers and DVDs. His income is $100 a week. He remembers that last week he bought 14 hamburgers and 2 DVDS and the week before he bought 8 hamburgers and 4 DVDs. Each week he spent his entire income. However, he can’t remember the prices for hamburgers or DVDs. Graph Franks budget set. What is the price of hamburgers? Of DVDs? 5 10 15 20 25 2 4 6 8 10 Frank's Budget Set Hamburgers DVDs Since both of Frank’s consumption bundles must satisfy his budget equation p 1 x 1 +p 2 x 2 =100, we can substitute in his two choices and get two equations in two unknowns: p 1 14+p 2 2=100 p 1 8+p 2 4=100 Solving the system of equations gives p 1 =5 and p 2 =15....
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This note was uploaded on 05/05/2010 for the course ECONMOICS ECON 203 taught by Professor Josephpetry during the Spring '10 term at University of Illinois, Urbana Champaign.
- Spring '10