Question

1. Assume a consumer consumes only pumpkin pie and apple cider. Price of pie, P_p is $8 and price of cider, P_c is $5, and income of the consumer is $160.
   1. Write down this consumers Budget constraint. Draw the BC and mark the x and y coordinates. What is the slope of this BC?
   2. If the income increases to $240, show graphically how the BC changes. Mark the x and y coordinates. Write down the new BC. What is the slope of the BC?
   3. If instead the price of pie increases to $10, show graphically how the BC changes. Mark the x and y coordinates. Write down the new BC. What is the slope of the BC?

Answer 1

Budget constraint Represents all the combinations of goods and services that a consumer may purchase with given current prices within the given level of income.

A) price of Pumpkin pie is $8 ,price of Apple cider is $5

The above table depicts the combination of goods which the consumer could buy with the given level of income and price.

The slope of budget constraint is straight line downward sloping y-axis to x-axis.

B) when income increases to $240

The above table shows the combination of goods which can be purchased the given level of income and price.

The slope of budget constraint is straight line downward sloping from y-axis to x-axis.

C)when price of Pumpkin pie increases to $10

The above table depicts the combination goods which can be purchased with level price and income level.

The slope of budget constraint is straight line downward sloping y-axis to x-axis.