You consume only two categories of goods:DVDs and clothing. You have $270 each w

ID: 1172930 • Letter: Y

Question

You consume only two categories of goods:DVDs and clothing. You have $270 each week to spend on these goods, and you cannot save money from week to week. The price of each DVD is $30 and the price of each unit of clothing is $30. The following graph shows four different infference curves (I1, I2, I3, I4) that represent your prederences between clothing and DVDs. On this graph, use the bue points (circle symbol) to draw the budget constraint you face, given prices and income. Then use the black point (X symbol) to indicate the optimal consumption bundle of clothing and DVDs, given these various indiffernce curves.

Consider the following simplistic example. You consume only two categories of goods: DVDs and clothing. You have $270 each week to spend on these two goods, and you cannot save money from week to week. The price of each DVD is $30, and the price of each unit of clothing is also $30. The following graph shows four different indifference curves (11, 12, 13, and 14) that represent your preferences between clothing and DVDs. On this graph, use the blue points (circle symbol) to draw the budget constraint you face, given prices and income. Then use the black point (X symbol) to indicate the optimal consumption bundle of clothing and DVDs, given these various indifference curves. Dashed drop lines will automatically extend to both axes.

Explanation / Answer

The budget constraint will be drawn between I2 and I3, as you can only buy a maximum of 9 shirts or 9 movies (or a mix of each to reach $270)

Now you can either consume on the I1 cure or the I2 curve, both are in budget. But to maximize happiness you want to consume on the I2 curve, consuming on the I1 curve does not maximize spending or happiness. Thus, curves I1, I3, and I4 can be ignored.

So on the I2 curve, all of that is within budget and ANY point on that curve would maximize spending/happiness.

So, the black dots can go along that curve. (the program you're using may have you put them at the exact sspots you would be spending all $270 so be careful! )

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You consume only two categories of goods:DVDs and clothing. You have $270 each w

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