Question

(a) Eric has $20 per month to spend on coffee and bread. The price of a cup of coffee and bread is $1. Write the equation for Eric's budget line.

(b) Draw his budget line.

(c) Draw how his budget line changes if the price of a cup of coffee falls to 0.50. Make sure to label the x and y intercepts.

(d) Going back to a price of $1 for each, draw how the budget line changes if his income decreases to $10.

(e) Going back to an income of $20, draw how the budget line changes if both goods prices go from $1 to $2.

Answer 1

a. The budget line is represented by the equation Px*X+Py*Y = I, where Px and Py are the price of the two commodities, X and Y are quantities and I represents income. The budget line will be 1X+1Y = 20

b. if price of coffee falls to 0.5 (Coffee is taken on X axis), then new budget line will be 0.5X+Y = 20

c. If income decreases to 10, the new budget line changes to X+Y=10

d. If price of both goods increases to 2 and income is 20, the budget line will be 2X+2Y=20, or X+Y=10, so this doubling of price will have the same effect as decrease ion income to 10. The budget line will conincide in the two cases, one where income falls to 10 and the other where price of both goods doubled to 2.