Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Question
Chapter 21, Problem 5PA
Subpart (a):
To determine
The budget constraint of a person.
Subpart (b):
To determine
The budget constraint of a person.
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Eric buys only milk and cookies. In year 1, Eric earns $90, milk costs $2 per quart, and cookies cost $3 per dozen. Use the green line (triangle symbol) to draw Eric's budget constraint on the following graph.
Now suppose that all prices increase by 10 percent in year 2 and that Eric's salary increases by 10 percent as well.
Use the blue line (circle symbol) to draw Eric's new budget constraint on the preceding graph.
True or False: Eric will consume more milk and fewer cookies in year 2 than in year 1.
True
False.
Jim buys only milk and cookies. a. In year 1, Jim earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Jim’s budget constraint. b. Now suppose that all prices increase by 10 percent in year 2 and that Jim’s salary increases by 10 percent as well. Draw Jim’s new budget constraint. How would Jim’s optimal combination of milk and cookies in year 2 compare to his optimal combination in year 1?
Could you please provide me in details answer?
Explain how the budget constraint might change if income and prices of all goods increased in same proportion?
Chapter 21 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
Ch. 21.1 - Prob. 1QQCh. 21.2 - Prob. 2QQCh. 21.3 - Prob. 3QQCh. 21.4 - Prob. 4QQCh. 21 - Prob. 1QRCh. 21 - Prob. 2QRCh. 21 - Prob. 3QRCh. 21 - Prob. 4QRCh. 21 - Prob. 5QRCh. 21 - Prob. 6QR
Ch. 21 - Prob. 7QRCh. 21 - Prob. 1QCMCCh. 21 - Prob. 2QCMCCh. 21 - Prob. 3QCMCCh. 21 - Prob. 4QCMCCh. 21 - Prob. 5QCMCCh. 21 - Prob. 6QCMCCh. 21 - Prob. 1PACh. 21 - Prob. 2PACh. 21 - Prob. 3PACh. 21 - Prob. 4PACh. 21 - Prob. 5PACh. 21 - Prob. 6PACh. 21 - Prob. 7PACh. 21 - Prob. 8PACh. 21 - Prob. 9PACh. 21 - Prob. 10PACh. 21 - Prob. 11PACh. 21 - Prob. 12PACh. 21 - Prob. 13PA
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- Why does a change in income cause a parallel shift in the budget constraint?arrow_forwardA consumer has $300 to spend on goods X and Y. The market prices of these two goods are Px = $15 and Py = $5. Draw the budget constraint for X and Y. Suppose the income increases by $300. How does this increase in income affect the budget line and the market rate of substitution between goods X and Y? Draw a shift on the same graph of what happens to the budget constraint line when the price of good Y increases to $10. How does this change in the price of good X affect the market rate of substitution between goods X and Y?arrow_forwardSuppose that the price of commodity Y is $1 per unit while the price of commodity X is $2 per unit and suppose that an individual’s money income is $16 per time period and is all spent on X and Y. (a) Draw the budget constraint line for this consumer and explain the reason for the shape and the properties of the budget constraint linearrow_forward
- John has $300 as income and he uses his income only for apples and bananas. If he uses his income only for apples, he can buy 10 pounds. If he uses his income only for bananas, he can buy 15 pounds. Which one is the correct formula for his budget constraint when X=pounds of apples, Y=pounds of bananas and the prices are per pound? a) More information is needed to answer the question. b) 15X + 10Y = 300 c) 10X + 15Y = 300 d) 20X + 30Y = 300 e) 30X + 20Y = 300arrow_forwardQ19 Suppose a consumer can purchase only two goods: pasta and rice. Let the quantity of pasta be measured on the vertical axis and the quantity of rice be measured on the horizontal axis. If the price of pasta falls, with no change in the price of rice or in the consumer's money income, then the budget line for the consumer will rotate... a. Outward parallel to the existing budget line. b. Toward the origin and become flatter. c. Away from the origin and become steeper. d. Away from the origin and become flatter. e. Toward the origin and become steeper.arrow_forwardIt is given that the price of goods X and Y are both Rs.10 each, a consumer consumes 10 units of X and 10 units of Y at equilibrium.a. Draw the budget line and indifference curve and show the point of consumer equilibrium. b. If the price of X falls to Rs.5, PY and money income remaining the same, what is the real income increase?c. At the new equilibrium caused by a fall in price of X, the consumer has a combination of 16 units of X and 12 units of Y. Show the price effect of a change in price of X using the PCC.d. Why are more units of Y consumed even though its price has not fallen?arrow_forward
- Given the following budget line pxx+pyy=m And that the slope of the budget line depends only on relative prices, show what happens to the budget line when: (a) px rises (b) m reduces (c) Both px and py rise by the same proportion (d) a consumer is given an in-kind transfer of 40 units of good y (e) the government imposes a quantity tax (t) on good y please take note of the imagearrow_forwardSuppose a consumer has a monthly income of m = 100 which she spendson two commodities: french fries (x1) and beef jerky (x2). The price offrench fries is p1 = 2 and the price of beef jerky is p2 = 5. (e) What is the slope of the budget line? Provide an economicinterpretation of this number.(f) Because of Mad Cow Disease, the price of beef jerky increasesto $10 (lower supply of beef). On a new graph, plot the originaland new budget constraint clearly identifying how the budgetconstraint has changed. What is the new relative price of beefjerky in terms of french fries?(g) Because of severe shortages, Congress passes the Jerky ReliefAct which limits each consumer to purchase at most 5 packs ofjerky. Show on a graph how this affects the consumer’s budgetset. Answer all three.arrow_forwardThe the consumer-facing the budget line P1x1+p2x2=M where p1 and p2 price is given as good 1 and 2 and x1 and x2 are quantity demanded for good 1 and 2 respectively,M is consumer income ,if the price of good 1 doubles ,the price of good 2 becomes 5 times larger and incomes becomes 3 times larger , write down an equation for the new budget line in terms of the original prices and incomearrow_forward
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