--%>
Assignment Help - homework help

Budget line and indifference curves

Question:

Monica has been considering buying a mountain bike. Last month Monica had an income of $30,000. The bike's price was $1000, the composite good price was $1, and she decided not to buy the bike.  This month Monica was surprised to get a $10,000 increase in income. The prices of the bike and the composite good are the same, but now Monica decides to buy the bike. Draw a budget line and indifference curves to illustrate this situation. Be sure to label you diagram completely. 

Solution:

Income, m = $30,000, Pb = $1000, Pc = $1

Where, Pb = price of bike.

             Pc = price of composite goods

Therefore, Budget equation is:

c + Pb b = 30000

  1.   c = 30000 - Pb b
  2.   c = 30000 - 1000b

Therefore, putting c on vertical axis, the slope is -1000

Also, vertical intercept = 30000/1 = 30000

         Horizontal intercept = 30000/1000 = 30

The new income = $40,000

Therefore, Budget equation is:

c + Pb b = 40000

  1.   c = 40000 - Pb b
  2.   c = 40000 - 1000b

Therefore, putting c on vertical axis, the slope is -1000

Also, vertical intercept = 40000/1 = 40000

         Horizontal intercept = 40000/1000 = 40

690_budget line and indifference curves.png

   Related Questions in Business Economics

  • Q : Contestable Markets The least probable

    The least probable of the given industries to be a contestable market is: (1) video rentals. (2) pizza delivery. (3) cable television. (4) trucking. Can someone explain/help me with best solution about problem of <

    		•
  • Q : How might government correct this

    What divergences arise between equilibrium and an efficient output spillover benefits are present?  How might government correct this divergence?

    		•
  • Q : What are the major provisions of GATT

    What are the major provisions of GATT

    		•
  • Q : Define the terms Plant Define the

    Define the following terms?

    		•
  • Q : Main philosophical foundations of

    Jeremy Bentham’s musings given main philosophical foundations for: (1) the abolition of slavery. (2) syndicalism. (3) free international trade. (4) feudalism. (5) utilitarianism. Can someone explain/help me w

    		•
  • Q : Increase in the American dollar price

    “An increase in the American dollar price of the South Korean won implies that the South Korean won has depreciated in value.”  Explain.

    		•
  • Q : How demand is influenced by price

    Describe how the demand for a good is influenced by the price of its associated goods. Give illustrations.

    		•
  • Q : Different types of leverages in

    Write down the different types of leverages which are computed for financial analysis?

    		•
  • Q : Single seller not sell at a price lower

    An individual seller within perfect competition will not sell at a price lower than the market price since: w) demand for the product will exceed supply.  x) the seller would begin a price war. y) the seller can sell any quantity she desires at the prevailing mar

    		•
  • Q : History of King Louis world of commerce

    Early in the 18th century, a leading industrialist responded to an advisor of King Louis IV of France, who asked how the crown could most excellent facilitate the world of commerce, along with “Laissez nous faire,” that im

    		•