Question

Amy is in school learning to weld she spends long hours studying and drinking coffee and long hours welding in the hot dirty shop and therefore takes frequent showers and he has $70 a month to spend on the soap and coffee she needs to function properly draw Amy’s budget constraint assuming the sub cost $3.50 per bottle and the coffee cost $14 a pound also assume that Amy spends all of her money on either so for coffee or some combination of both every time Amy buys a pound of coffee she is giving up opportunity by what

Answer 1

Solution:-

Amy has $70.00 a month to spend on the soap and coffee, i.e., budget per month is: $70

The soap cost is: $3.50, and

The coffee cost is: $14.00

The equation to the budget constraint:

Budget (M) = (Px*Qx) +(Py*Qy)

Now Qx = M/Px and Qy = M/Py

Thus,

If Amy spends his entire $70 on soap, he can buy 20 soaps i.e., 70/3.5 = 20

If Amy spends his entire $70 on coffee, he can buy 5 coffee’s i.e., 70/14 = 5.

The Amy's budget constraint could be drawn as below:

That means, 1 pound of coffee = 4 bottles of soap.

So, Every time Amy buys a pound of coffee, she is giving up the opportunity to buy:

4 bottles of soap.