Question

Tom is trying to decide how to allocate his $50 budget for music downloads and online movie streaming when the price of a music download is $1 and the price of a movie is $5.

Reference: Ref 10-6

(Scenario: Tom's Budget Constraint) Read the scenario Tom's Budget Constraint. The combination _____ music downloads and _____ movies lie INSIDE Tom's budget line. (Tom can afford this combination, but he will not be spending the entire $50.)

	50; no
	50; 10
	100; 5
	no; 5

Answer 1

Answer: no; 5

Budget line shows all combinations of goods and services that can be bought at given prices if the entire income is spent.

Budget line: Y = Px * Qx + Py * Qy

x + 5y = 50

The bundle which lies inside budget line will be x + 5y < 50

(Tom can afford this combination, but he will not be spending the entire $50.)

0*x + 5*5 = 25

$25 < $50

Hence, the bundle, that consists of 0 units of music downloads, and 5 units of movies lies inside the budget line.