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Jacob buys only milk and cookies. a. In year 1, Jacob earns $100, milk costs $2 per quart, and cookies cost S4 per dozen. Draw Jacob’s budget constraint. b. Now suppose that all prices increase by 10 percent in year 2 and that Jacob’s salary increases by 10 percent as well. Draw Jacob’s new budget constraint. How would Jacob’s optimal combination of milk and cookies in year 2 compare to his optimal combination in year 1?

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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126

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Section
BuyFindarrow_forward

Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 21, Problem 5PA
Textbook Problem
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Jacob buys only milk and cookies.

a. In year 1, Jacob earns $100, milk costs $2 per quart, and cookies cost S4 per dozen. Draw Jacob’s budget constraint.

b. Now suppose that all prices increase by 10 percent in year 2 and that Jacob’s salary increases by 10 percent as well. Draw Jacob’s new budget constraint. How would Jacob’s optimal combination of milk and cookies in year 2 compare to his optimal combination in year 1?

Subpart (a):

To determine
The budget constraint of a person.

Explanation of Solution

When an individual’s wants and needs are unlimited, but the budget of an individual is limited, it will lead to a constraint of needs. This type of constraint raised due to limited budget is known as the budget constraint of the individual. Thus, budget constraint represents all the possible combination of goods and services that can be purchased with the entire income at a given price level.

Here, the income of the person is $100 and the price of one quart milk is $2, and the price of a dozen cookies is $4. Thus, when the consumer spends his entire income on the purchase of milk, the quantity that he receives can be calculated by dividing the income by per quart price as follows:

Quantity received=IncomePer quart price=1002=50

Thus, when he spends all his income on milk, he can buy 50 quarts of milk

Subpart (b):

To determine
The budget constraint of a person.

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