Question

Your budget is such that by spending all of your income, you could afford 12 pizzas or 36 liters of Beverage per week. Draw your budget line, placing Beverages (in liters) on the vertical axis? Write out a budget equation that would generate this budget line? Is there only one budget equation that will work? What is the slope of the budget line? If you want to use your budget to buy an additional pizza, how many less Beverages will you be able to purchase?

Answer 1

Your budget is such that by spending all of your income, you could afford 12 pizzas or 36 liters of Beverage per week

Draw your budget line, placing Beverages (in liters) on the vertical axis and Pizzas on the horizontal axis.

Vertical axis intercept of budget line will be the maximum quantity of Beverage you can afford if you spend all your income on Beverages. Hence, the verical intercept of budget line is 36 liters of Beverage.

Horizontal axis intercept of budget line will be the maximum quantity of Pizzas you can afford if you spend all your income on Pizzas. Hence, the horizontal intercept of budget line is 12 pizzas.

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Let, Pp => Price of pizza

Pb => Price of beverages

P => Quantity of pizza

B=> Quantity of beverages

M => Income available to spend

General Budget line equation: P*Pp + B*Pb = M

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Vertical axis intercept of budget line = (Income / Price of beverages)

=> 36 = (M/Pb)

=> M = 36*Pb ------------eq(1)

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Horizontal axis intercept of budget line = (Income / Price of pizza)

=> 12= (M/Pp)

=> M = 12*Pp -----------------eq(2)

Set eq(1) = eq(2)

=> 36*Pb = 12*Pp

=> Pp / Pb = 36/12

=> Pp / Pb = 3 ----------------- eq(3)

It measn pizza price equals to three times the price of beverages.

If Pb = 1, then Pp = 3 and M = 36

becasue M = (36 *Pb)

=> M = 36.

Budget line equation: 3P + 1B =36.

This is not the only budget equation which derives the above budget line. Any combination of Pb and Pp which satisfies equation 3 will generate the above budget line.

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Slope of budget line = -(Price of good measure on horizontal axis / Price of good measure on vertical axis)

=> Slope of budget line = -(Pp / Pb)

=>Slope of budget line = -3

For to buy each additional pizza,you are able to purchase 3 less units of Beverages