Sarah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a loaf, and the price of chicken is $5 per pound.?
- Sarah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a loaf, and the price of chicken is $5 per pound.
- Draw her budget constraint and label it BC0. Put bread on the horizontal axis and chicken on the vertical axis. Be sure to identify the intercept values.
- Suppose Sarah is a utility maximizer and consumes ten loaves of bread and 12 pounds of chicken. On the same graph, you drew in part (a), draw an indifference curve to identify her optimal bundle. Label this bundle" "E."
- Is her budget exhausted? Verify your answer.
- Now suppose Sarah's income falls so that she can now devote only $80 to the two goods. Prices, however, remain unchanged. In the same diagram, graph her new budget constraint and label it BC1. Be sure to identify any new intercept values.
- Following the change in income, can Farah consume the same bundle" "E"? Explain your answer.
- What must happen to her total utility following the decrease in her income?
- Archie has $40 weekly on any combination of pineapples and green tea. The price of pineapple is $5, and a bottle of green tea is $2.50. The table below shows Archie's utility values. Use the table to answer the questions that follow.
- Complete the table by filling in the blank spaces.
- Suppose Archie purchases four pineapples and two bottles of green tea. Is he consuming the optimal consumption bundle? If so, explain why. If not, what combination should he buy and why?
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