last year the price of bread was $2 per loaf and Lidia spent $100 on bread. This
ID: 1184991 • Letter: L
Question
last year the price of bread was $2 per loaf and Lidia spent $100 on bread. This year, the price of bread rises to $3 per loaf, while Lidia's income is unchanged. To compensate her for the price change, Lidia's father gives her a gift of $50 cash. Consider an indifference curve-budget line diagram with bread on the horizontal axis and all other goods on the vertical axis.
(i)After lidia receives the gift will her new budget line lie above, lie below or pass through her initial optimum?
(ii)This year, will lidia be better or worse off than she was last year? ( for the answer for this i feel like it depends cause of the shifts from price and income on the budget line)
Explanation / Answer
a) Since the income has increased now , the new budget line will lie above the optimum ; b) She is better than last year because...consider change of price first income be constant ...so budget line will become more steep as price of quantity increases ....but the increase in income later will shift this budget line parallely ...and the budget line will start from same initial point (price is same i.e 100/2 = 150/3 )...so now we have line starting from same point but with steep slope so it will meet Indifference curve at higher point and hence she will be better than last year ...
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