Question on budget line

Question

On a Lotto Canada ticket A person won $15 at the local 7-Eleven & decided to spend all the winnings money on bags of peanuts and candy bars. The cost of candy bars= $.75 and the cost of peanuts = $1.50.

a. In general, how would he decide which of the obtainable combinations of candy bars and bags of peanuts to buy?

b. Assume that he had won $30 on your ticket, not $15. Illustrate the $30 budget line in your diagram. Why would this budget line is preferable to the old one?

 

 

Answer 1

(a) The decision of how much of each to purchase would involve weighing the marginal benefits & marginal costs of the several alternatives.  If, for instance, the marginal benefits of moving from alternative C to alternative D are greater than the marginal costs, then this consumer have to move to D (and then compare again to E, and so forth, until MB=MC is obtained).

(b)

The budget line at $30 would be preferable since it would let greater consumption of both goods.