In: Economics
Use the following information to work Problems (a) and (b). Show all your workings.
Sara’s income is $12 a week. The price of popcorn rises from $3 to $6 a bag, and the price of smoothie is unchanged at $3.
a ) How does the rise in the price of popcorn affect the relative price of a smoothie in terms of popcorn? What is the slope of Sara’s new budget line if it is drawn with smoothies on the X-axis?
When Price of popcorn is $3 and price of smoothie is $3,
If Sara spends all the $12 to purchase Popcorn, she can purchase maximum 4 bags of Popcorn (i.e., $12/ $3) and if she spends all the $12 to purchase Smoothie, she can purchase maximum 4 Smoothies (i.e., $12/ $3).
When Price of popcorn is $6 and price of smoothie is $3,
If Sara spends all the $12 to purchase Popcorn, she can purchase maximum 2 bags of Popcorn (i.e., $12/ $6) and if she spends all the $12 to purchase Smoothie, she can purchase maximum 4 Smoothies (i.e., $12/ $3).
The budget lines are shown below:
Initially the relative price of a smoothie in terms of popcorn = 4 / 4 = 1 popcorn
When the price of Popcorn changes to $6,
The relative price of a smoothie in terms of popcorn = 2 / 4 = 0.5 popcorn
The slope of Sara’s new budget line = -(4 / 2) = -2