Step 1
Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.
Tyrone is a utility maximizer. His income is $100, which he can spend on cafeteria meals and on notepads. Each meal costs $5, and each notepad costs $2. At these prices Tyrone chooses to buy 16 cafeteria meals and 10 notepads.
Placing notepads on the vertical axis and cafeteria meals on the horizontal axis calculate the vertical and horizontal intercepts and slope of the budget constraint.
The vertical intercept: notepads
The horizontal intercept: meals
Slope:
Correct! For further review see section “Indifference Curves and Consumer Choice”.
Incorrect, remember the vertical intercept is the point where Tyrone spends all of his income on notepads. In this case Tyrone has $100 and each notebook costs $2. If he spends all of his income on notepads, Tyrone can purchase 50 notepads ($100/$2). The horizontal intercept is the point where Tyrone spends all of his income on cafeteria meals and no notepads. Tyrone still has $100 and each meal costs $5 which means Tyrone can purchase 20 meals ($100/$5). The slope of the budget constraint is equal to –(vertical intercept)/(horizontal intercept) or -50/20 = -2.5. For further review see section “Indifference Curves and Consumer Choice.”
Placing notepads on the vertical axis and cafeteria meals on the horizontal axis calculate the vertical and horizontal intercepts and slope of the budget constraint.
Correct! For further review see section “Indifference Curves and Consumer Choice”.
Incorrect, remember the vertical intercept is the point where Tyrone spends all of his income on notepads. In this case Tyrone has $100 and each notebook costs $2. If he spends all of his income on notepads, Tyrone can purchase 50 notepads ($100/$2). The horizontal intercept is the point where Tyrone spends all of his income on cafeteria meals and no notepads. Tyrone still has $100 and each meal costs $5 which means Tyrone can purchase 20 meals ($100/$5). The slope of the budget constraint is equal to –(vertical intercept)/(horizontal intercept) or -50/20 = -2.5. For further review see section “Indifference Curves and Consumer Choice.”
Placing notepads on the vertical axis and cafeteria meals on the horizontal axis calculate the vertical and horizontal intercepts and slope of the budget constraint.