Use the following information to work Problems (a) and (b). Show all your workings. Sara’s income...

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?

Solutions

Expert Solution

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

Rahul Sunny answered 1 month ago

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