Question

Indifference Curve and Budget Line:

Annie has an income of $240 an hour. Cookies costs $4 a bag, and costs $8 a six-pack of energy drink

a.Draw a graph of Annie’s budget line with six-pack of energy drink on the x-axis, and cookies on the y-axis.

b.What is the slope of Annie’s budget line? What could this slope be also called?

c.If we know that Annie maximizes her utility with the purchase of 20 bags of cookies, how many six-pack energy drink she will purchase? -(an estimate from a graph), draw an indifference curve reflecting this optimum.

Answer 1

Income = $ 240, Cookies = $4 /bag, energy drink = $ 8 per six pack

A. Budget line,

If Annie consumes only cookies then she will consume 60 cookies.

Now, when she consumes only six pack energy pack then she consumes 30 pack (six pack)

B. Slope of budget line = MRS

Slope of budget line is also known as Marginal Rate of substitution.

C. She consumes 20 bags of cookies.

Then she consumes

240 = 4*20 + 8E

8E = 240 - 80

8E = 160

E = 20

So, she consumes 20 units of energy drinks.

The indifference curve will be tangent to the PPF at that point.

Please contact if having any query thank you.  

Will be obliged to help