Question

Bush receives a weekly allowance of $40 from his parents that he uses to purchase two goods: Pokemon cards (which cost $5 per pack) and comic books (which cost $4 each). Draw Bush’s budget constraint and write his budget equation. Show what would happen if Bush’s parents lower his allowance to $30 per week.   

Answer 1

The amount of Pokemon cards purchased be P and the comic books purchased be C. The total allowance is $40. The price of Pokemon cards is $5 per card and comic book is $4 per book. The budget constraint of Bush is given by:

The maximum number of Pokemon cards that can be purchased are given when C =0. Replacing C = 0 in the above equation, we get, P(max) = 8. Similarly, the maximum amount of comic books that can be purchased is when P =0 , so that C(max) = 10.

When the allowance decreases to $30, the budget constraint is given by:

In this case, P(max) = 6 and C(max) = 7.5

The budget constraint for bush shifts towards the origin when the allowance decreases from $40 to $30. These are shown in the figure below.