Question

10. Deriving demand from an Indifference map Megan lives in Dallas and enjoys drinking lattes and eating scones. The price of a latte is held constant at $3 throughout this problem. On the following graph, the purple curves (I, and I?) represent two of Megan's Indifference curves. The lines BC and BC show two budget constraints. Points X and Y show Megan's optimum consumption bundles subject to these budget constraints. 20 18 16 14 12 LATTES 10 2 BC BC 0 10 12 SCONES

Answer 1

Price of latte =$3 (given)

From the given graph , we can see that when vertical intercept is 20 lattes i.e when Megan consumes 0 scones and spend all of his income on the consumption of lattes. This implies that total income = ($3)(20)= $60.

That means, Megan's available income for lattes and scones is $60.

For BC1 , horizontal intercept is 20 scones ,this implies that price of scone = $60/20= $3.

Optimal consumption of good occurs when indifference curve is tangent to the budget line. We can see from the given graph that at BC1 , optimal consumption of scones is 12.

For BC2 , horizontal intercept is 10 scones ,this implies that price of scone = $60/10= $6.

Optimal consumption of good occurs when indifference curve is tangent to the budget line. We can see from the given graph that at BC2 , optimal consumption of scones is 6.

When Megan's budget constraint is	Price (Dollars per scone)	Consumption (Scones0
BC1	3	12
BC2	6	6

By plotting this we get the demand curve for scones as shown below: