Question

2. What is the relationship between marginal utilities and prices when you are maximizing your satisfaction? (Your answer must include a discussion of budget constraints, the choice of the consumption bundle with the highest satisfaction, marginal utilities and use your answers in previous question.)

(Part II: Budget Constraint) Put meat on horizontal and potatoes on vertical axis.
1. (Day 1) Suppose your income is $1000, prices of meat and potatoes are $10 and $20, respectively. Find the budget constraint equation and draw the budget line. Explain what the two intercepts mean.

2. (Day 2) Now meat has become cheaper. It costs $5. Your income and the price of potatoes did not change. Answer the same questions given in 1.

Answer 1

1) If the price of meat is 10 and potato is 20 and the income is 1000, then the budget constraint equation is as follows:

Or

(Price of Meat) x (Meat units) + (Price of potato) x (Potato units) = Income

Lets assume the following data set:

Budget	Meat	Potato
1000	0	50
1000	20	40
1000	40	30
1000	80	10
1000	100	0

Both intercepts mean the maximum amount of meat or potato that the income can buy at the given price level if we buy only that good, so we can either buy 100 units of meat or 50 units of potato or some combination in between

2) If the price of meat reduces to $5 then:

1) If the price of meat is 10 and potato is 20 and the income is 1000, then the budget constraint equation is as follows:

Or

(Price of Meat) x (Meat units) + (Price of potato) x (Potato units) = Income

Lets assume the following data set:

Budget	Meat	Potato
1000	0	50
1000	40	40
1000	80	30
1000	160	10
1000	200	0

Both intercepts mean the maximum amount of meat or potato that the income can buy at the given price level if we buy only that good, so we can either buy 200 units of meat or 50 units of potato or some combination in between