3. Consider we wanted to know how many trips versus dinners out you could purcha

Question

3. Consider we wanted to know how many trips versus dinners out you could purchase. If you were told that X = number of trips and Y = the number of dinners out and you were given the following budget information; M=4000, Px=800, and Py=100, answer the following questions.

Note: In general we may note that W Px*X + Py*Y à use M instead of W for the purposes of this question.

i. Graph the budget line, and determine the market rate of substitution. Make sure to Illustrate the budget set as well as what is unaffordable. Also note the maximum amounts of both trips and dinners you can purchase given wealth/Income and prices.

ii. Show in your graph what happens to the budget constraint if Px decreases to $500 (i.e. the costs of trips drops).

iii. What is the meaning of the slope of the two budget constraints? Explain using the values you calculated.

Explanation / Answer

i) 800x + 100y <=4000 : Budget constraint

market rate of substitution: 800/100 = -8

All the points outside the budget set will be unaffordable.

Maximum x = 5

Maximum y = 40

ii) If Px decreases then budget line will pivot from y axis

iii) Slope of the budget constarint reflect its prices

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