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Econ 221 Homework for Thursday August 24 ~ Budget Lines and the consumption of 2 goods
A Budget Line
is a graph that shows all the possible combinations of 2 goods that can be purchased if all income is
spent on those two goods. To draw a budget line, you need to know the prices of the two goods and the amount of
income that is available to be spent on those goods.
Example: The consumption of 2 goods: bagels and coffee
In order to draw this budget line, assume the following:
1.
you spend all of your monthly income on bagels and coffee
2. your monthly income is $50.00
3. the price of a bagels is $1.00
4. the price of a cup of coffee is $0.50
Questions:
a. What is the opportunity cost of a bagel in terms of coffee?
b. What is the opportunity cost of a cup of coffee in terms of bagels?
Since a budget line gives all the possible combinations of 2 goods that can be purchased if all income is
spent, before we can draw it we need to think about the various combinations of bagels and coffee that can
be purchased with our income.
Of course, there are many potential
consumption possibilities.
For example,
we could spend all our income on bagels, all on coffee, or some combination of bagels and coffee.
Consumption possibilities that use up our $50.00 income:
Fill in the following table according to these consumption possibilities:
•
Let consumption possibility 1 (CP1) be the combination that results if you spend all of your income on bagels.
⇒
CP1 = 50
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 Fall '07
 Wadman
 Microeconomics

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