--%>
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 : Describe the term Cost of debt Briefly

    Briefly describe the term Cost of debt?

    		•
  • Q : Principle of comparative advantage When

    When Gene can make three pairs of cowboy boots per week or one saddle whereas Roy can make either two pairs of boots or two saddles, Gene will form boots whereas Roy makes saddles according to the: (i) Law of Occam’s Razor. (ii) Principle of comparative advantag

    		•
  • Q : Rise in participation of women in the

    Which two of the six reasons listed in the Last Word do you think are the most important in explaining the rise in participation of women in the workplace? Explain your reasoning.

    		•
  • Q : Technological advances in producing

    When given resources can now produce additional goods than was previously probable, then there have been a: (1) Stock market boom. (2) Competitive spurt which shrinks entrepreneurial gain. (3) Concavity reversal in the production possibilities frontier. (4) Bigger rel

    		•
  • Q : Problem on current production

    I have a problem in economics on current production possibilities frontier. Please help me in the following question. The combination of 70 units of clothing and 30 units of food are: (1) Completely employs the economy's capacity. (2) Would leave most

    		•
  • Q : Increase the overall effectiveness of

    How the government can increase the overall effectiveness of the market system?

    		•
  • Q : Perfect Competition leads to Allocative

    A perfectly competitive industry achieves allocative efficiency since: w) goods and services are produced at the lowest possible cost. x) services and goods are produced up to the point where the last unit gives a marginal benefit to consumers equivalent to the margin

    		•
  • Q : Describe unequal burdens of

    Describe unequal burdens of unemployment exist?

    		•
  • Q : Market structure and pricing decision

    Just need help to see if I am in the right direction if there any think wrong need help with it.

    		•
  • Q : Speculators activities over the long-run

    Over the long-run the speculators activities are tend to: (1) decrease the volatility of prices. (2) attract legal attention and result in imprisonment. (3) increase the level and volatility of prices both. (4) yield tremendous profits and raise costs

    		•