110_11s_SelectedQ_Ch09

110_11s_SelectedQ_Ch09 - Econ 110 Selected Questions From...

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1 Econ 110 Selected Questions From Chapter 9 - POSSIBILITES, PREFERENCES, AND CHOICES 1. Sara’s income is $12 a week. The price of popcorn is $3 a bag, and the price of a smoothie is $3. a. What is Sara’s real income in terms of smoothies? Sara’s real income is 4 smoothies. Sara’s real income in terms of smoothies is equal to her money income divided by the price of a smoothie. Sara’s money income is $12, and the price of a smoothie is $3. Sara’s real income is $12 divided by $3 a smoothie, which is 4 smoothies. b. What is her real income in terms of popcorn? Sara’s real income is 4 bags of popcorn. Sara’s real income in terms of popcorn is equal to her money income divided by the price of a bag of popcorn, which is $12 divided by $3 a bag or 4 bags of popcorn. c. What is the relative price of smoothies in terms of popcorn? The relative price of a smoothie is 1 bag of popcorn per smoothie. The relative price of a smoothie is the price of a smoothie divided by the price of a bag of popcorn. The price of a smoothie is $3 and the price of popcorn is $3 a bag, so the relative price of a smoothie is $3 divided by $3 a bag, which equals 1 bag of popcorn per smoothie. d. What is the opportunity cost of a smoothie? The opportunity cost of a smoothie is 1 bag of popcorn. The opportunity cost of a smoothie is the quantity of popcorn that must be forgone to get a smoothie. The price of a smoothie is $3 and the price of popcorn is $3 a bag, so to buy one smoothie Sara must forgo 1 bag of popcorn. e. Calculate the equation for Sara’s budget line (with bags of popcorn on the left side). The equation that describes Sara’s budget line is Q P = 4 – Q S . Call the price of popcorn P P and the quantity of popcorn Q P , the price of a smoothie P S and the quantity of smoothies Q S , and income y. Sara’s budget equation is P P Q P + P S Q S = y. If we substitute $3 for the price of popcorn, $3 for the price of a smoothie, and $12 for the income, the budget equation becomes $3Q P + $3Q S = $12. Dividing both sides by $3 and subtracting Q S from both sides gives Q P = 4 – Q S . f. Draw a graph of Sara’s budget line with quantity of smoothies on the x - axis. To draw a graph of the budget line, plot the quantity of smoothies on the x-axis and the quantity of popcorn on the y-axis. The budget line is a straight line from 4 bags of popcorn
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2 on the y-axis to 4 smoothies on the x-axis. g. In part f, what is the slope of Sara’s budget line? What determines its value? The slope of the budget line, when smoothies are plotted on the x-axis, is minus 1. The magnitude of the slope is equal to the relative price of a smoothie. The slope of the budget line is “rise over run.” If the quantity of smoothies decreases from 4 to 0, the quantity of popcorn increases from 0 to 4. The rise is 4 and the run is 4. Therefore the slope equals 4/ 4, which is 1. 2.
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110_11s_SelectedQ_Ch09 - Econ 110 Selected Questions From...

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