Problem
Lionel likes to eat a nice piece of Brie cheese while having a glass of wine. He has a monthly gourmet budget of $120. In a diagram with wine on the vertical axis and cheese on the horizontal axis, suppose that the intercepts are 10 bottles on the wine axis and 4 kilos on the cheese axis. He is observed to purchase 5 bottles of wine and 2 kilos of cheese.
(a) What are the prices of wine and cheese?
(b) Suppose that the price of wine increases to $20 per bottle, but that LionelŠs income simultaneously increases by $60. Draw the new budget constraint and mark the intercepts.
(c) Is Lionel better off in the new or old situation? [Hint: ask if he can now afford the bundle he purchased with a lower income and lower wine price.]
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.