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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 xaxis and the
quantity of popcorn on the yaxis. The budget
line is a straight line from 4 bags of popcorn
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on the yaxis to 4 smoothies on the xaxis.
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 xaxis, 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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 Spring '11
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