Question 3 a. Marsha has a salary of $500. He spends his entire budget on milk and cookies. The cost of a gallon of milk is $4 and the cost of a slice of cookies is $8. i. Construct Marsha’s budget constraint (place) cookies on the y-axis. ii. Suppose Marsha’s salary rises by 50%. Also suppose that the price of milk and cookies each rise by 50%. Construct Marsha’s new budget constraint. What is the difference between the new and old budget constraints? iii. Suppose that the price of cookies fell from $8 per cookie to $4. Construct Marsha’s new budget constraint. What is the difference between the new and old budget constraints.
Question 3
a. Marsha has a salary of $500. He spends his entire budget on milk and cookies. The cost of a gallon of milk is $4 and the cost of a slice of cookies is $8.
i. Construct Marsha’s budget constraint (place) cookies on the y-axis.
ii. Suppose Marsha’s salary rises by 50%. Also suppose that the price of milk and cookies each rise by 50%. Construct Marsha’s new budget constraint. What is the difference between the new and old budget constraints?
iii. Suppose that the price of cookies fell from $8 per cookie to $4. Construct Marsha’s new budget constraint. What is the difference between the new and old budget constraints.
b. Explain the relationship between the budget constraint and indifference curve at consumer optimum.
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