Question

Stephanie is planning a cruise to the Caribbeans and has a budget for new evening wear of $500. She plans to purchase new shoes and dresses. The average price for a pair of shoes is $50 while the average price for an evening dress is $100. Her current budget constraint is pictured in the graph. Stephanie catches an end of season sale on dresses and the average price of dresses falls to $50. As a result:

A. The opportunity cost of each individual dress increases as a result of the price reduction.

B. Stephanie's new budget constraint will be flatter.

C. Stephanie will be able to afford more dresses for a given number of shoes.

Answer 1

Answer. (c) Stephanie will be able to afford more dresses for a given number of shoes.

Explanation: In a budget constraint, the main thing to find out is the intercept points. Intercept points mean what amount of shoes or dresses would Stephanie be able to buy if she spent all her income only on one good. So when the intital prices of shoes and dresses are 50 and 100 dollars respectively. the intercept points would be (500/50) shoes and (500/100) dresses. That is, 10 shoes and 5 dresses. Now when the price of dress has decreased to 50 dollars, the intercept point for dress also changes to (500/50) = 10 dresses. This means that now, even after buying one pair of shoes, she would be left with the same amount of money but due to a fall in prices, she would be able to buy more dresses out of that remaining money. For example, if initially she buys two pair of shoes which costs 50*2=100. Remaining income is 500-100 = 400. With the initial price of 100, she would be able to buy only 400/100= 4 dresses. But with lower price of 50, she can now buy 400/50= 8 dresses.