ECON205 - Homework04 - S09

ECON205 - Homework04 - S09 - / ' CJ~~ 1. An individual's...

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Unformatted text preview: / ' CJ~~ 1. An individual's budget line ~ Y' Suppose Akshay has a monthly budget of $96 to spend on yogurt and milk. Milk costs $3 per gallon, and yogurt costs $2 per bowl. If Akshay spends his entire $96 on milk, he can buy 32 " gallons of milk per month. If he spends his entire $96 on yogurt, he can buy 48 " bowls of yogurt per month. Close A-- -- -- - - - - - - - - - - - - - - - - - , -- - - - - - -- - - - - - - - - Explanation: Since milk costs $3 per gallon, if Akshay spends $96 on milk, he can buy $96 / $3 per gallon = 32 gallons of milk. Since yogurt costs $2 per bowl, if Akshay spends $96 on yogurt, he can buy $96 / $2 per bowl = 48 bowls of yogurt. Using the blue line (circle symbols), plot Akshay's budget constraint on the diagram below. Next, use the orange triangle (square symbols) to shade the area that represents combinations of milk and yogurt that are affordable for Akshay. Finally, place the black point (X symbol) on the point on Akshay's budget constraint that corresponds to a scenario in which Akshay spends $48 on each good. Answer YOGURT (Bowls per month) 6 0 b BC11$96] " YOGURT [Bowls per month] 6 0 b 4 8 0 Affordable Region " 4 8 0 36 36 o b 36 48 60 MILK [Gallons per monthl 24 12 o o 24 .----- I I I I I I I 12 BC2 ($120) " $48 on Each " [Clear All J [Belpl o b 36 48 60 MILK [Gallons per month) 24 12 o o 24- ----- I I I I I I I 12 Explanation: Close A Akshay's budget constraint shows the combinations of milk and yogurt he can afford each month with his $96. You found above that if Akshay spends his entire income on milk, he can buy 32 gallons of milk per month, and if he spends his entire income on yogurt, he can buy 48 bowls of yogurt per month. Since he could spend all his money on milk, spend all his money on yogurt, or split his money between the two goods, Akshay's budget constraint extends from the point (32 gallons of milk, 0 bowls of yogurt) to the point (0 gallons of milk, 48 bowls of yogurt). The set of affordable combinations of milk and yogurt includes all combinations of milk and yogurt that cost $96 or less. Visually, this is represented by the area below the budget constraint. For example, the combination (8 gallons of milk, 12 bowls of yogurt) is affordable because it would only cost $48. However, a point like (32 gallons of milk, 48 bowls of yogurt) would not be affordable because it would cost $192, which is more than Akshay has available to spend. If Akshay spends $48 on milk and $48 on yogurt, he buys $48 / $3 per gallon::: 16 gallons of milk and $48/ $2 per bowl::: 24 bowls of yogurt. Therefore, you should have plotted the point (16, 24) on the diagram. Note that you should not have plotted the point (48, 48). This diagram shows the combinations of milk and yogurt that he can afford, not the amount that he spends on each....
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ECON205 - Homework04 - S09 - / ' CJ~~ 1. An individual's...

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