1) If the budget equation is the following 7,339 x1 + 6,589 x2 = 14,322. What...

1) If the budget equation is the following 7,339 x₁ + 6,589 x₂ = 14,322. What is the maximum amount of x₂ that the consumer can buy?

2) A consumer's budget line shows

a. the utility that an individual would receive from consuming various combinations of two goods

b. the combinations of two goods that an individual is able to purchase, given prices and income

c. how income is influenced by prices of goods

d. how changes in income affect utility

e. the relationship between prices and income

3. A consumer spends his income between pizza and beer. The intercept of the budget line on the pizza axis is 447, the intercept of the budget line on the beer axis is 570 and the price beer is 85. What is the consumer's income?

4. If the budget line equation is x₂ = - 95/55 x₁ + 9,558/55

What is the price of x₁ ?

5. Harrison spends all of his income on vacation trips and textbooks. If the price of a trip is $121 and the price of a textbook is $78, then the slope of his budget line (assuming vacation trips are measured on the vertical axis) would be

Solutions

Expert Solution

1) The budget equation is 7,339x₁ + 6,589x₂ = 14,322.

If one has to buy only x₂, then x₁=0 and thus x₂=14,322/6,589 = 2(approx)

2) A consumer's budget line shows the various combinations of consumption of goods with given prices of goods and a given level of income. Contrast to option a, budget line does not represent an utility level. Hence, option a is incorrect. Contrast to option c and e, budget line do not suggests any proper relation or dependence between income and prices of goods. Hence, option c and e are incorrect. A budget line all alone cannot state any relation between changes in income and utility level. Hence, option d is incorrect. Here, only correct option b as the budget line clearly represents various combinations of goods with given prices of goods and at a given income level.

3) In the given case, the intercept on beer axis is 570 and the beer price is 85. The intercept on pizza axis is 447.This means that the consumer can either buy 447 pizza or 570 beer from his income. Hence, consumer's income = beer intercept *beer price = 570*85 = 48,450

4) The equation of the budget line is x₂ = -95/55 x₁ + 9558/55 or, 55x₂ = -95 x₁ + 9,558 or, 95x₁ + 55x₂ = 9,558. Comparing this with the budget equation P₁x₁ + P₂x₂= M , (where P₁ is the price of good x₁ , P₂ is the price of good x₂ , M is the income) , P₁ = 95.

5) Budget equation is given by P₁x₁ + P₂x₂ = M (P₁ = price of good x₁ , P₂ = price of good x₂ , M= income) . Slope of the budget line is given by Slope = P₁/P₂. In the given question, P₁ =$121 and P₂ =$78. Then, slope of the budget line= 121/78.

Rahul Sunny answered 2 years ago

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