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EconomicsQ&A Library1. Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. The price of candy bars is $.75 and the price of peanuts is $1.50.a. Construct a table showing the alternative combinations of the two products that are available.b. Plot the data in your table as a “budget” line in a graph. What is the slope of the “budget” line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts?Question

Asked Jun 5, 2019

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1. Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. The price of candy bars is $.75 and the price of peanuts is $1.50.

a. Construct a table showing the alternative combinations of the two products that are available.

b. Plot the data in your table as a “budget” line in a graph. What is the slope of the “budget” line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts?

Step 1

It is given that,

Total income (M) earned by winning lottery is $15.

M can be spend on consuming two goods i.e. candy bars (C) and bags of peanuts (P) where the price of candy bars (Pc) is $0.75 and the price of bags of peanuts (Pp) is $1.50.

We know that,

The budget line equation for the above situation can be written as:

Price of candy bars * quantity of candy bars purchased + price of bags of peanuts * quantity of bags of peanut purchased = total income earned by winning lottery

i.e. Pc * Qc + Pp * Qp = M

Now, substitute the values of Pc, Pp, and M in the budget line equation:

i.e. $0.75 * Qc + $1.50 * Qp = $15.

Step 2

Assume, Qp = 0.

Thus, the maximum quantity of candy bars that can be purchased = M/Pc = $15/$0.75 = 20 units.

Similarly, Assume Qc =0.

Thus, the maximum quantity of bags of peanuts that can be purchased = M/Pp = $15/$1.50 = 10 units.

Step 3

A. Now, assume Qc can take the values 0, 4, 8, 12, 16, 20. Thus, t...

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