   Chapter C, Problem 1QP

Chapter
Section
Textbook Problem

Diagram the following budget constraints: a. Income = $4,000; PX =$50; PY = $100 b. Income =$3,000; PX = $25; PY =$200 c. Income = $2,000; PX =$40; PY = $150 (a) To determine The budget constraint. Explanation Since the income is$4,000 and price of good X is $50, the quantity of good X can be calculated as follows: Quantity of good X=IncomePrice of good X=$4,000$50=80 Thus, the consumer will consume 80X. Since the income is$4,000 and price of good Y is $100, the quantity of good Y can be calculated as follows: Quantity of good Y=IncomePrice of good Y=$4,000$100=40 Thus, the consumer will consume 40Y. Now, the budget constraint can be represented as follows: In Figure 1, the vertical axis measures the quantity of good Y and the horizontal axis measures the quantity of good X. Concept Budget constraints: Budget constraint refers to the possible combination of goods and services that a consumer can purchase at a given price level with the entire income. (b) To determine The budget constraint. Explanation Since the income is$3,000 and price of good X is $25, the quantity of good X can be calculated as follows: Quantity of good X=IncomePrice of good X=$3,000$25=120 Thus, the consumer will consume 120X. Since the income is$3,000 and price of good Y is $200, the quantity of good Y can be calculated as follows: Quantity of good Y=IncomePrice of good Y=$3,000$200=15 Thus, the consumer will consume 15Y. Now, the budget constraint can be represented as follows: In Figure 2, the vertical axis measures the quantity of good Y and the horizontal axis measures the quantity of good X. Concept Budget constraints: Budget constraint refers to the possible combination of goods and services that a consumer can purchase at a given price level with the entire income. (c) To determine The budget constraint. Explanation Since the income is$2,000 and price of good X is $40, the quantity of good X can be calculated as follows: Quantity of good X=IncomePrice of good X=$2,000$40=50 Thus, the consumer will consume 50X. Since the income is$2,000 and price of good Y is $150, the quantity of good Y can be calculated as follows: Quantity of good Y=IncomePrice of good Y=$2,000\$150=13.33

Thus, the consumer will consume 13.33Y.

Now, the budget constraint can be represented as follows: In Figure 3, the vertical axis measures the quantity of good Y and the horizontal axis measures the quantity of good X.

Concept

Budget constraints: Budget constraint refers to the possible combination of goods and services that a consumer can purchase at a given price level with the entire income.

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