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: fwIPnBkWdu4= notepads

The horizontal intercept: Tu9IG1n3UyE= meals

Slope: z7X+NE9yA3w=

Correct! For further review see section “Indifference Curves and Consumer Choice” (please link to ebook).

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” (please link to ebook).

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.

The price of notepads falls to $1; the price of cafeteria meals remains the same. What are the new values for the vertical and horizontal intercepts and slope?

The vertical intercept: b0g0iQ1whKk= query.

The horizontal intercept: Tu9IG1n3UyE= query.

Slope: /euMlW48Z7w= query.

Correct! For further review see section “Indifference Curves and Consumer Choice” (please link to ebook).

Incorrect, if the price of notepads falls to $1, Tyrone can now purchase more notepads. If Tyrone spends all of his money on notepads he can purchase 100 notepads ($100/$1), the vertical intercept increases. The horizontal intercept will remain the same since the price of cafeteria meals has not changed. Since the vertical intercept has increased, the slope of the budget constraint is now -100/20 = -5. For further review see section “Prices, Income, and Demand” (please link to ebook).

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.

Lastly, Tyrone’s income falls to $90. What are the new values for the x and y intercepts? Assume the price of notepads remains $1 and cafeteria meals are $5.

The vertical intercept: 8P3aa4uLOo8= notepads

The horizontal intercept: XfbQwBcbq1Q= meals

Slope: DYU2tVvtzEQ=

Correct! For further review see section “Indifference Curves and Consumer Choice” (please link to ebook).

Incorrect, if Tyrone’s income decreases to $90 then he will purchase fewer notepads and cafeteria meals. The vertical intercept decreases to 90 notepads ($90/$1). The horizontal intercept will decrease to 18 meals ($90/$5). The slope is measure of relative prices and does not change when there is only a change in income, the slope remains -5 (-90/18). For further review see section “Prices, Income, and Demand” (please link to ebook).

Correct.

Incorrect.