Question

Suppose you're a Tim Hortons addict and spend all your money on coffee and doughnuts. You have $15 to spend. Doughnuts cost $1 each and coffee costs $1.50/cup. Draw a budget line that reflects this situation. Then show what would happen if the price of coffee fell to $1/cup.

Answer 1

If you spend all the $15 to buy only Doughnuts, you can purchase maximum of 15 doughnuts (i.e., $15 / $1 = 15). And if you spend all the $15 to buy only coffee, you can purchase maximum of 10 cups of coffee (i.e., $15 / $1.50 = 10).

If we measure Doughnuts in Y-axis and Coffee in X-axis, the Y-axis coordinates will be (15,0) and the X-axis coordinate will be (0, 10) The Budget line is BL1 as shown in below figure.

0 1 2 3 8 9 10 11 4 5 6 7 Quantity of Coffee (Cups)

If the price of coffee fell to $1/cup and if you spend all the $15 to buy only coffee, you can purchase maximum of 15 cups of coffee (i.e., $15 / $1 = 15).

If we measure Doughnuts in Y-axis and Coffee in X-axis, the Y-axis coordinates will be (15,0) and the X-axis coordinate will be (0, 15) The Budget line is BL2 as shown in below figure.

Doughnuts (Units) - BL1 0 1 2 3 4 15 16 5 6 7 8 9 10 11 12 13 14 Quantity of Coffee (Cups)