Question

Sarah consumes avocado and egg in a fixed ratio of 1 avocado to 2 eggs. His initial endowment for avocado and egg are (10 ,50). Initially, prices of avocado and egg are $4 and $1 per unit respectively. However later the price of an avocado remains at $4 while the price of an egg increases to $3. After the price change, Sarah would consume: ____ avocado

Answer 1

Ans. Income from the endowment, M = 10* price of the avacados + 50*price of egg
=> M = 10*4 + 50*1 = $90

Now, suppose consumption of avacados is x, so, consumption of eggs will be 2x as they are consumed in fixed proportions od 1:2, budeget constraint equation ,

x*4 + 2x * 1 = 90

=> x = 15 units

So, 15 units of avacados are consumed and 30unuts of eggs are consumed initially.

After increase in price of eggs to $3,

New income from endowment, M' = 10*4 + 50*3 = $190

So, new budget constraint,

4x + 2x*3 = 190

=> x = 19 units

Thus, 19 units of avacados are consumed and 38 units of eggs are consumed.

* Please don’t forget to hit the thumbs up button, if you find the answer helpful.