Question

Refer to the graph below for the questions la)-le). Barney consumes gasoline and burritos and the graph illustrates his indifference curves. burritos 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 gasoline 1. Suppose Barney has an income of $120, Pgasoline = $10, and Pburrito = $5. Draw Barney's budget constraint in the above figure. a) What is the opportunity cost of one unit of gasoline? b) At this income and prices of gasoline and burritos, what is the optimal consumption bundle for Barney? c) Suppose the price of gasoline falls from $10 to $5, with income and Pburritos staying the same. What is the change in the amount of demand for gasoline? d) Suppose that Barney owns some mineral rights in North Dakota and when the gasoline price falls from $10 to $5, his income also falls from $120 to $60. Taking into account both the price change and the income change, is Barney better or worse off in the new situation? (Hint: Draw in the new budget constraint in the above graph.)

Answer 1

Refer to the graph below for the questions la)-le). Barney consumes gasoline and burritos and the graph illustrates his indifference curves. burritos 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 gasoline 1. Suppose Barney has an income of $120, Pgasoline = $10, and Pburrito = $5. Draw Barney's budget constraint in the above figure. a) What is the opportunity cost of one unit of gasoline? b) At this income and prices of gasoline and burritos, what is the optimal consumption bundle for Barney? c) Suppose the price of gasoline falls from $10 to $5, with income and Pburritos staying the same. What is the change in the amount of demand for gasoline? d) Suppose that Barney owns some mineral rights in North Dakota and when the gasoline price falls from $10 to $5, his income also falls from $120 to $60. Taking into account both the price change and the income change, is Barney better or worse off in the new situation? (Hint: Draw in the new budget constraint in the above graph.)

At The budget constraint GxPg + BX P22 equation M. given by - laxat SXB2 120. T 2a+B= 24 – AB represents budget as Opportunity Cost of I unit of lire en graph. Gasoline - 2 urite of Burritos (because price of burrite is half the price of Gasoline) (6) The optional consumption bundle occurs at the point where budget line is tangent to Indifference Curne. Thu, s units of Burritos and 8 units of gasoline is the optimum consumption bundle. ( The new demand equation: 56+ SB = 120 G + B = 24. AB' represents the new budget line of the consumer. and consumption of Gasoline has increased to 16 units . Thus, change in demand for Gasoline - 16-8= 8 unite. d) New budget tire: 56+ 5B= 60. G + B = 12 CB is the new budget line. He is worse of in, in the new situation because he has moved to a lower indifference cuine.