Question

9. (5 pts) Using the graph shown, construct a demand curve for M&M's given an income of $5. Quantity of MaMo 10 2 3 45 67 0 Quantty ol Shite

Answer 1

According to the question,

The given income is $5

We can calculate the prices of both the goods using the above graph and budget lines.

Consider the x-axis, point where the budget line meets this axis. That point has coordinates as (x=10, y=0).

Budget line is defined as total expenditure equals to total income earned.

Budget line: p_x *X +p_y*M&M = 5

At point (10,0) we have : p_x *10+p_y.*0 = 5

or, p_x *10 =5

p_x = 1/2

Similarly, consider the y-axis , point where the budget line meets this axis. That point has coordinates as (x=0, y=5).

At point (0,3) we have : p_x *0+p_y.*5= 5

or,p_y.*5= 5

p_y.= 5 /5=1

Now when price changes of M&M, the line meets the x-axis on the same coordinate. However, line meets y-axis at different coordinate.

Now, new coordinates are (x=0, y=10).

At point (0,5) we have : p_x *0+p_y.*10= 5

or,p_y.*10= 5

p_y.= 5/10 = 1/2 = 0.5

We have got two points to draw the demand curve of M&M:

Variable	A	B
py	1	0.5
M&M	5	10

The quantity demanded is inversely related to prices. Thus, the demand curve will be downward sloping (given below).

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