Suppose from now on that instead of an income of $12, Niki owns 5 kg of...

Suppose from now on that instead of an income of $12, Niki owns 5 kg of apples and 7 kg of oranges, which he can sell at the original prices ($1/kg for oranges and $1/kg for apples), if he desires so.

Draw (on a new diagram!) Niki’s budget line.Hint: whatever the prices of oranges and apples are, Niki can always afford to consume 5 kg of apples and 7 kg of oranges, simply by not selling or buying any fruits.
Suppose that the price of apples decreases to $0.5/kg. Draw Niki’s budget line and show the new optimal consumption basket. Can you say for sure whether Niki would increase his consumption of oranges?

Expert Solution

Two fruits: A and O

1^st part:

The budget equation is as below:

Budget = Cost of A + Cost of O

Or, 12 = (A × 1) + (O × 1)

Or, 12 = A + O

Based on the above equation: if there is 0 consumption of A, then O = 12; if there is 0 consumption of O, then A = 12.

Rahul Sunny answered 2 years ago

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