Question

2. Alex views tea (T) and coffee (C) as perfect substitutes, where one cup of coffee gives him the same utility as one cup of tea. Suppose each cup of coffee costs £1.80 and each cup of tea costs £1.25 and Alex has a monthly budget of £45 to spend on tea and coffee.

1. Write the expression for Alex's budget constraint. With coffee on the horizontal axis and tea on the vertical axis, graph the budget constraint and determine its slope.
2. What is Alex's best affordable bundle of tea and coffee? Illustrate your answer.
3. Suppose there's a special offer and all tea and coffee are half price. How would Alex's best affordable bundle change? Illustrate your answer.
4. Under what, if any, circumstances would Alex consume both tea and coffee?

Answer 1

Given,

-Marginal utility of both products is the same.

-budget is 45 euros.

-price of tea=1.25, price of coffee=1.80.

a)The expression for the budget constraint is 1.80x+1.25y=45.

the slope of the give expression is to be calculated by converting it to standard form which is

36-1.44x=y Hence, the slope is -1.44 units.

B)Best affordable bundle is (0,36) because the goods are a perfect substitution so the max utilization would be max products which happens at point (0,36)

C)if the special offer stands then the most affordable would be (0,72) as double the products would be affordable and on the budget line.

D) IF the price of coffee decreases of the price of tea increases then he would consume both.

in other scenario if the utility of the products changes aledx would have both tea and coffee