Question

Suppose that an individual is choosing how to allocate their budget for afternoon snacks between two goods: lattes and cookies. Lattes cost $4.00 and cookies cost $2.00. The individual budgets $20 a week.

(a) Write down the equation for the individual’s budget line. Plot that budget line on a graph where lattes are on the vertical axis and cookies are on the horizontal axis. Be sure to label the axes and intercepts. What is the slope of the budget line?

(b) Suppose that the price of a cookie increases to $3.00. Draw how this would effect the budget line you drew in part (a). Supposing that the individual liked lattes and cookies, explain how this shift might change how they allocated their budget.

(c) In response to the cookie price change, the individual decides to increase their snack budget to $30 a week. Plot their new budget line (it could be on the same graph as earlier or a new graph). If they wanted to consume an equal number of cookies (and they wanted to use their entire budget), how many cookies and lattes would they choose to buy?

Answer 1