Suppose you consume only two types of goods: magazines and food. You have $300 each week to spend on these two goods, and you cannot save money from week to week. The price of each magazine is $30, and the price of each unit of food is also $30. The following graph shows four different indifference curves. Suppose that your grandmother gives you six magazines for Christmas. 16 15 FOOD 14 13 12 11 10 9 8 6 5 4 3 2 1 Budget Constraint Optimal Bundle 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 MAGAZINES With the gift, you can afford a total of units of food and 6 magazines without spending any money on the magazines. And if you don't spend any money on food, you can afford a total of magazines and zero units of food. On the following graph, use the blue points (circle symbol) to draw your budget constraint given your initial prices, income of $300, and the gift of 6 magazines s. FOOD 16 15 14 13 12 11 S 10 9 Budget Constraint Optimal Bundle 7 6 Consumption with Gift 12 5 4 3 Additional Consumption 2 1 0123456789 10 11 12 13 14 15 16 MAGAZINES Now suppose that instead of giving you six magazines for Christmas, your grandmother decides to give you the cash she would have spent to purchase six magazines; this is known as the cash equivalent of the gift. The cash gift increases your income by, so now you have an income of to spend. The cash gift increases your income by $ , so now you have an income of $ to spend. On the previous graph, use the purple triangle (diamond symbols) to shade in the additional consumption bundles available if your grandmother gives you the cash equivalent of six magazines instead of the magazines themselves. With the cash equivalent of six magazines, which of the following consumption bundles are affordable and, at the same time, make you better off than the optimal consumption choice if your grandmother gives you six magazines? Check all that apply. A) 2 magazines and 12 units of food B) 4 magazines and 12 units of food C) 3 magazines and 13 units of food D) 4 magazines and 13 units of food
Suppose you consume only two types of goods: magazines and food. You have $300 each week to spend on these two goods, and you cannot save money from week to week. The price of each magazine is $30, and the price of each unit of food is also $30. The following graph shows four different indifference curves. Suppose that your grandmother gives you six magazines for Christmas. 16 15 FOOD 14 13 12 11 10 9 8 6 5 4 3 2 1 Budget Constraint Optimal Bundle 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 MAGAZINES With the gift, you can afford a total of units of food and 6 magazines without spending any money on the magazines. And if you don't spend any money on food, you can afford a total of magazines and zero units of food. On the following graph, use the blue points (circle symbol) to draw your budget constraint given your initial prices, income of $300, and the gift of 6 magazines s. FOOD 16 15 14 13 12 11 S 10 9 Budget Constraint Optimal Bundle 7 6 Consumption with Gift 12 5 4 3 Additional Consumption 2 1 0123456789 10 11 12 13 14 15 16 MAGAZINES Now suppose that instead of giving you six magazines for Christmas, your grandmother decides to give you the cash she would have spent to purchase six magazines; this is known as the cash equivalent of the gift. The cash gift increases your income by, so now you have an income of to spend. The cash gift increases your income by $ , so now you have an income of $ to spend. On the previous graph, use the purple triangle (diamond symbols) to shade in the additional consumption bundles available if your grandmother gives you the cash equivalent of six magazines instead of the magazines themselves. With the cash equivalent of six magazines, which of the following consumption bundles are affordable and, at the same time, make you better off than the optimal consumption choice if your grandmother gives you six magazines? Check all that apply. A) 2 magazines and 12 units of food B) 4 magazines and 12 units of food C) 3 magazines and 13 units of food D) 4 magazines and 13 units of food
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:Suppose you consume only two types of goods: magazines and food. You have $300 each week to spend on these two goods, and
you cannot save money from week to week. The price of each magazine is $30, and the price of each unit of food is also $30. The
following graph shows four different indifference curves. Suppose that your grandmother gives you six magazines for Christmas.
16
15
FOOD
14
13
12
11
10
9
8
6
5
4
3
2
1
Budget Constraint
Optimal Bundle
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
MAGAZINES
With the gift, you can afford a total of units of food and 6 magazines without spending any money on the magazines. And if you
don't spend any money on food, you can afford a total of magazines and zero units of food.
On the following graph, use the blue points (circle symbol) to draw your budget constraint given your initial prices, income of
$300, and the gift of 6 magazines s.
FOOD
16
15
14
13
12
11
S
10
9
Budget Constraint
Optimal Bundle
7
6
Consumption with Gift
12
5
4
3
Additional Consumption
2
1
0123456789 10 11 12 13 14 15 16
MAGAZINES
Now suppose that instead of giving you six magazines for Christmas, your grandmother decides to give you the cash she would
have spent to purchase six magazines; this is known as the cash equivalent of the gift.
The cash gift increases your income by, so now you have an income of to spend.
The cash gift increases your income by $
, so now you have an income of $
to spend.
On the previous graph, use the purple triangle (diamond symbols) to shade in the additional consumption bundles available if
your grandmother gives you the cash equivalent of six magazines instead of the magazines themselves.
With the cash equivalent of six magazines, which of the following consumption bundles are affordable and, at the same time,
make you better off than the optimal consumption choice if your grandmother gives you six magazines? Check all that apply.
A) 2 magazines and 12 units of food B) 4 magazines and 12 units of food
C) 3 magazines and 13 units of food D) 4 magazines and 13 units of food
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