--%>
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 : Fixed or managed exchange rate

    Question: A country with a fixed or managed exchange rate would consider i.___________________ its currency to gain competitive advantage vis-à-vis its trade

    		•
  • Q : Who define Theory of Moral Sentiments

    The argument which slicing off one’s pinkie would be extra bothersome to which person than the loss of millions of his brethren was made within A Theory of Moral Sentiments (1755) through: (1) Adam Smith. (2) David Ricardo. (3) Theophrastus Phil

    		•
  • Q : Production function for the game

    Question Can you describe what the production function for the game looks like? (How are labour, capital and resources combined? Are there constant, increasing or decreasing returns to scale?) Answer

    Q : Entertainment tax-Indirect tax Why

    Why entertainment tax comes in indirect tax? Answer: Since its burden can be shifted to others.

    		•
  • Q : Elucidate Participants in international

    Elucidate Participants in international trade of U.S. and World Trade?

    		•
  • Q : National currencies of foreign exchange

    Elucidate various national currencies of foreign exchange market?

    		•
  • Q : Describe the Slope of a nonlinear curve

    Describe the Slope of a nonlinear curve?

    		•
  • Q : Need of the Economic Efficiency

    Economic efficiency for society needs which the: (i) opportunity costs of all goods be at their lowest possible values. (ii) maximum probable benefits are acquired for given costs. (iii) greatest possible net benefits are squeezed through available re

    		•
  • Q : Why producers not be able to find

    Why producers not be able to find enough paying buyers for “public goods”?

    		•
  • Q : Economic efficiency enhancement as

    Transaction costs are decreased and economic efficiency is enhanced by: (1) long-term wage and price controls. (2) monopolies which cooperate with central planners. (3) blacklists and yellow dog contracts. (4) bureaucratic tendencies

    		•