PS5_Essay

# PS5_Essay - ECON 1001 Essay Question Problem Set 5 Jane has...

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ECON 1001 Essay Question Problem Set 5

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Jane has \$100 to spend. There are only 2 goods for her to choose: compact discs (CDs) and hamburgers. Price of CD = \$10 Price of hamburger = \$2
(a) Draw Jane’s Budget Line and find the optimal quantities of CDs and hamburgers to be consumed. What is a Budget Line? A Budget Line is the ‘Budget Constraint’ of the economic agent. It represents all the different combinations of the 2 goods that Jane can consume when spending all her \$100.

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How do we draw a Budget Line? In a simple setting like in this question (no change in price of either goods throughout, no restrictions or special pricing arrangements), the Budget Line is usually a downward sloping straight line. The X and Y-intercepts represents the amount of CDs or Hamburgers Jane can buy if she spends all her money on only one good.
Let us put CDs on the vertical axis (Y-axis) and hamburgers on the horizontal axis (X- axis). If Jane is spending all \$100 on CDs, and price of a CD is \$10, she can at most buy 10 CDs. Hence, the Y-intercept of Jane’s Budget Line is 10.

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Similarly, if she spends all the money only on hamburgers (Price = \$2), she can buy 50 hamburgers. So the x-intercept of the Budget Line is 50.
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## This note was uploaded on 10/02/2011 for the course ECON 1001 taught by Professor S.c during the Spring '10 term at HKU.

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PS5_Essay - ECON 1001 Essay Question Problem Set 5 Jane has...

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