Andre has a salary of $1000. He spends his entire budget on shoes and beers. The cost for a pair of shoes is $15 and the cost for can of beer is $25. i. Construct Andre’s budget constraint (place) beers on the y-axis. [4 marks] ii. Suppose Andre’s salary rises by 25%. Also suppose that the price of shoes and beers each rise by 40%. Construct Andre’s new budget constraint. What is the difference between the new and old budget constraints? [4 marks] iii. Suppose that the price of beers fell from $25 per beer to $15. Construct Andre’s new budget constraint. What is the difference between the new and old budget constraints. [4 marks] b. Explain the relationship between the budget constraint and indifference curve at consumer optimum. [3 marks]
a. Andre has a salary of $1000. He spends his entire budget on shoes and beers.
The cost for a pair of shoes is $15 and the cost for can of beer is $25.
i. Construct Andre’s budget constraint (place) beers on the y-axis. [4
marks]
ii. Suppose Andre’s salary rises by 25%. Also suppose that the
shoes and beers each rise by 40%. Construct Andre’s new budget
constraint. What is the difference between the new and old budget
constraints? [4 marks]
iii. Suppose that the price of beers fell from $25 per beer to $15. Construct
Andre’s new budget constraint. What is the difference between the new
and old budget constraints. [4 marks]
b. Explain the relationship between the budget constraint and indifference curve
at consumer optimum. [3 marks]
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