Question

A consumer has $100 to divide between purchasing wine and quiche. Suppose wine costs $10 per bottle if the consumer purchases up to 5 bottles. After that, it is $5 per bottle. Suppose quiche is $5 each. Please draw the budget line. Will a consumer purchase exact 5 bottles of wine? And why? (Explain it using both the graph and words)

Answer 1

Price of Quiche, Pq = $5

Price of wine, Pw = $10 , w<=5

= $ 5 , w>5

Income of the consumer, I = $100

If consumer spends all his income on Quiche then quantity demanded = 100 / 5 = 20

If consumer spend his entire income on wine the quantity demanded = 100 /10 = 10

now, if he buys more than 5 bottles of wine then for first 5 bottles he pays $10 * 5 = $50. So remainig income is $50 which he spend onwine at price $5, so quantity = 50 / 5 = 10

Total quantity demanded = 5 + 10 = 15

Wec can see from the graph that as price decreases for the wine, the quantity demanded increases. The consumer will buy more of wine with discount and the endownment point will shift from e1 to e2.