Question

2. Deriving own-price demand from an indifference map Aa Aa E Laura lives in San Diego and enjoys drinking coffee and listening to records on her vintage record player. The price of a cup of coffee is held constant at $1 throughout this problem. On the following diagram, the red curves (IC1 and IC2) are two of Laura's indifference curves. The lines BC1 and BC2 show two budget constraints. Points X and Y show Laura's best bundles subject to these budget constraints. CUPS OF COFFEE IC1 C2 BC2 0 2 4 6 8 10 12 14 16 RECORDS , and the blue line (BC2) is The grey line (BC1) is Laura's budget constraint when the price of a record is her budget constraint when the price of a record is

Answer 1

Price of cup of coffee = $1 (Given)

Price of records = Income/Quantity of records

When the budget constraint is represented by grey line , then it touches the vertical axis at 48 , which means 48 cups of coffee and we know that price of coffee is $1 , so we can derive income = (48)($1) = $48.

And we can see that grey budget line touches the horizontal axis at 6 , which means 6 records. As a result, we can find that price of records = ($48)/6 = $8.

And blue budget line touches the horizontal axis at 12 , which mans 12 records . As a result , we can find that price of records = ($48)/12 = $4.

So, the grey line (BC1) is Laura's budget constraint when the price of a record is $8 and the blue line (BC2) is her budget constraint when the price of a record is $4.

Based on this we get the demand curve for records points :

When P = $8 , then optimal consumption of records is 4 records (which is represented by IC1 tangent to grey budget line) , so quantity of records = 4.

When P=$4 , then optimal consumption of records is 4 (which is represented by IC2 tangent to blue budget line), so quantity of records = 8.

Price	Quantity demanded
4	8
8	4

By plotting these points we get the Laura's demand curve for records, :

Bile Dollars) o 2 4 6 8 10 12 duantity (Records)