Question

If your income is 100k/wk, you need to allocate your income on food and other goods. Suppose the price of food is $10/unit; draw the budget line for composite goods, the money spent on others, and quantity of food. Determine the slope of budget line. If you had a bundle at which MB = 15, how would you change your bundle to increase your satisfaction.

Answer 1

The budget line is the locus of all such a combination of food and money spent on other goods that can be bought by the consumer given all his money income. This is given as

M = Pz.I+y

Here x is the quantity of food, y is the income spent on other goods, and M is the money income of the consumer. Given that M=100, Px=10

100 = 10x +y

... g = 100 – 103

Measuring money spent on other goods on the Y-axis, the above equation gives the slope of the budget line as -10. The budget line is depicted in the figure below

Money spent on other good Budget line(slope=10) Food

This implies the at equilibrium marginal benefit of food must be 10. If the MB of the bundle consumed is 15, to reach the equilibrium, the MB has to decrease. the MB decreases when one consumes more of that good. Therefore, to reach equilibrium the consumer must increase the amount of food consumed.