Miley Cyrus, under the conditions of a court order, is required to enroll Summer session at Kardashian College. She is granted $50 a week to spend: either on energy drinks at $2.50 each or on gasoline for her Bentley at $4.00 per gallon.
a) Draw Miley’s opportunity set. Label her feasible set. (Put gasoline on horizontal axis.)
(Suggestion: Draw a sufficiently large diagram as you will add more items to the same graph in subsequent parts.)
b) In part a), what is the trade-off (opportunity cost) of energy drinks in terms of gasoline?
c) In the graph for part a) above, now draw each new budget constraint she would face if:
i) The price of energy drinks fell to $2, ceteris paribus;
ii) The price of gasoline rose to $4.50 per gallon, ceteris paribus;
d) In each case in part c), how does the trade-off (opportunity cost) of energy drinks in terms of gasoline change.