Question

Cameron likes to eat hot dogs, but franks and buns must be purchased separately. Cameron needs an equal number of franks and buns (1 frank + 1 bun = 1 hot dog; they are perfect complements) and has a budget of $3 for hot dogs. The price of hot dog buns is always $0.25 each. If the price of franks is $0.50 each, how many franks and buns will Cameron buy? If the price of franks increases to $0.75 each, how many franks and buns will Cameron buy? First, use your common sense to answer the question, and then explain your answer by drawing Cameron's indifference curves and budget lines for buns and franks. Put buns on the x-axis.

Answer 1

Let the quantity of franks and buns be x (as equal number of both are required for a hot dog)

Therefore, amount spent on buns= 0.25x

Amount spent on franks= 0.5x

Total spent= 0.5x + 0.25x= 0.75x

Now, 0.75x = 3

x= 3/0.75= 4

Therefore, Cameron will buy 4 franks and buns and hence have 4 hot dogs.

Now, if the amount changes

Therefore, amount spent on buns= 0.25x

Amount spent on franks= 0.75x

Total spent= 0.75x + 0.25x= 1x

Now, x = 3

Therefore, Cameron will buy 3 franks and buns and hence have 3 hot dogs.

In the diagram, the two budget lines are being drawn and the L shaped figures are the indifference curves. Since equal no of franks and buns will be required. Hence, additional buns or franks will add no utility and hence the shape is L.

The points where these curves intersect the budget lines will be the two solution points.