EBK MICROECONOMICS
5th Edition
ISBN: 9781118883228
Author: David
Publisher: YUZU
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Chapter 4, Problem 5RE
To determine
To evaluate:
The reason of tangency between the slope of budget line and slope of indifference curve at optimal interior basket.
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A college student has two options for meals: eating at the dining hall for $6 per meal, or eating a Cup O’ Soup for $1.50 per meal. His weekly food budget is $60.
Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ Soup. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A.
Suppose the price of a Cup O’ Soup now rises to $2. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining hall meals. Label the new optimum as point B.
What happened to the quantity of Cups O’ Soup consumed as a result of this price change? What does this result say about the income and substitution effects? Explain.
What is the relationship between an indifference curve and budget constraint?
Why does the optimal consumption bundle occur where the budget line is tangent to the indifference curve?
Chapter 4 Solutions
EBK MICROECONOMICS
Ch. 4 - Prob. 1RECh. 4 - Prob. 2RECh. 4 - Prob. 3RECh. 4 - Prob. 4RECh. 4 - Prob. 5RECh. 4 - Prob. 6RECh. 4 - Prob. 7RECh. 4 - Prob. 8RECh. 4 - Prob. 9RECh. 4 - Prob. 10RE
Ch. 4 - Prob. 4.1PCh. 4 - Prob. 4.2PCh. 4 - Prob. 4.3PCh. 4 - Prob. 4.4PCh. 4 - Prob. 4.5PCh. 4 - Prob. 4.6PCh. 4 - Prob. 4.7PCh. 4 - Prob. 4.8PCh. 4 - Prob. 4.9PCh. 4 - Prob. 4.10PCh. 4 - Prob. 4.11PCh. 4 - Prob. 4.12PCh. 4 - Prob. 4.13PCh. 4 - Prob. 4.14PCh. 4 - Prob. 4.15PCh. 4 - Prob. 4.16PCh. 4 - Prob. 4.17PCh. 4 - Prob. 4.18PCh. 4 - Prob. 4.19PCh. 4 - Prob. 4.20PCh. 4 - Prob. 4.21PCh. 4 - Prob. 4.22PCh. 4 - Prob. 4.23PCh. 4 - Prob. 4.24PCh. 4 - Prob. 4.25PCh. 4 - Prob. 4.26PCh. 4 - Prob. 4.27PCh. 4 - Prob. 4.28PCh. 4 - Prob. 4.29PCh. 4 - Prob. 4.30P
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Similar questions
- Does a Budget constraint has only one individual indifference curve? Does every isocost line has a individual isoquant curve?arrow_forwardA college student has two options for meals: eating at the dining hall for $6 per meal, or eating a Cup O’ Soup for $1.50 per meal. Hisweekly food budget is $60. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ Soup. Assuming that he spends equal amounts on both goods, draw an indifference curve showing theoptimum choice. Label the optimum as point A.Suppose the price of a Cup O’ Soup now rises to $2. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining hall meals. Label the new optimum as point B.arrow_forwardWhy is the slope of an indifference curve convex? Which is the best indifference curve?arrow_forward
- Suppose your only source of income is work and that you are paid $20 per hour. This determines a budget constraint. You can buy free time at the expense of your income by working less. Likewise, you can get more income at the expense of your free time by working more. Suppose that you can choose how many hours you work. How do you decide exactly on which point of your budget constraint you will choose? Explain this by referring to your indifference curves.arrow_forwardDraw a budget constraint for an individual where if all income is dedicated to consumption of good X, the consumer can consume 40 units, and similarly, if the consumer dedicates all income to good Y 40 units can be consumed. What is the slope of the budget constraint? Draw in an indifference curve for this consumer showing an initial consumer equilibrium, with consumption of X and Y labelled. Now suppose that the price of good X falls such that 80 units of X could be purchased if the consumer dedicates all income to good X. What is the price ratio and slope of the new budget constraint? Draw in a new indifference curve tangent to the new budget constraint, together with consumption of X and Y. Identify the income and substitution effects graphically.arrow_forward#Let’s say John allocates his income amounting to $240 between sushi and canned tuna. Let unit price of sushi be $20 and unit price of canned tuna be $12. Draw the budget line. Now suppose price of canned tuna decreases to $6. Draw the new budget line. Draw two indifference curves. The first should be tangent to the old budget line and the second should be tangent to the new budget line (tangency points represent the two points of consumption for John where utility is maximized before and after the price change) such that canned tuna is an inferior but not a Giffen good. In the figure, show the income, substitution and total effects.arrow_forward
- A student living in a university hostel has two options for meals: eating at the dining hall for Rs.600 per meal, or eating a meal at Dhaaba for Rs.150 per meal. His weekly food budget is Rs.6000. Draw the budget constraint showing the trade-off between dining-hall meals and meals at Dhaaba. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A. Suppose the price of a Dhaaba meal now rises to Rs.200. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining-hall meals. Label the new optimum as point B. What happened to the quantity of meals at Dhaaba consumed as a result of this price change? What does this result say about the income and substitution effects? Explain. Use points A and B to draw a demand curve for meals at Dhaaba. What is this type of good called?arrow_forwardMake a curve of the budget line curve with the Indifference curve, make a separation between the substitution effect and the income effect Continue to make the demand curve decreasearrow_forwardDraw a budget constraint for two goods and set of indifference curves over the possible combinations of the goods. Label the optimal consumption bundle for your drawing.arrow_forward
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