Susan has the option to purchase eyeglasses, E, $3 each, and orange juice,O, $1 each. Her income is $24. i. Draw the budget line, with eyeglasses on the vertical axis, and orange juice on the horizontal axis, and compute the values of the intercepts. ii. What is the slope of the budget constraint? Are the following combinations of goods in the affordable set: (4E and 9O), (6E and 2O), (3E and 15O)? iii. Illustrate what happens to the budget line if the price of orange juice increases to $2.
Susan has the option to purchase eyeglasses, E, $3 each, and orange juice,O, $1 each. Her income is $24. i. Draw the budget line, with eyeglasses on the vertical axis, and orange juice on the horizontal axis, and compute the values of the intercepts. ii. What is the slope of the budget constraint? Are the following combinations of goods in the affordable set: (4E and 9O), (6E and 2O), (3E and 15O)? iii. Illustrate what happens to the budget line if the price of orange juice increases to $2.
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.7P
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Susan has the option to purchase eyeglasses, E, $3 each, and orange juice,O, $1 each. Her income is $24.
i. Draw the budget line, with eyeglasses on the vertical axis, and orange juice on the horizontal axis, and compute the values of the intercepts.
ii. What is the slope of the budget constraint? Are the following combinations of goods in the affordable set: (4E and 9O), (6E and 2O), (3E and 15O)?
iii. Illustrate what happens to the budget line if the price of orange juice increases to $2.
iv. Using the results in part (iii) explain the income and substitution effects?
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