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Principles of Economics (MindTap C...

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

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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 21.1, Problem 1QQ
Textbook Problem
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Draw the budget constraint for a person with income of $1,000 if the price of Pepsi is $5 and the price of pizza is $10. What is the slope of this budget constraint?

To determine
The budget constraint of a person and its slope.

Explanation of Solution

The budget constraint is the constraint which is due to the budget of the individual. The human wants and needs are unlimited and when the budget of the individual is not unlimited, it will lead to the constraint of needs and this constraint raised due to the limited budget is known as the budget constraint of the individual. Thus, a budget constraint will represent all the possible combinations of two commodities that an individual can consume at the given market prices and with all his income in hand.

Here, the income of the person is given as $1,000 and the price of one liter Pepsi is $5 and the price of pizza is $10. Thus, when the consumer spends her entire income on the purchase of Pepsi, the quantity that she can receive can be calculated by dividing the income with per liter price as follows:

Quantity received=IncomePer liter price=1,0005=200

Thus, when she spends all her income on Pepsi, she can buy 200 liters of Pepsi

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