Question

Sipho is a college student who receives a monthly allowance from his parents of R1000 which he uses to purchase food and other necessities. Sipho is made aware of a Campus food outlet that sells meals at R15 a meal. He then calculates that out of a total of R700 he uses for groceries, R450 is what he approximately spends on items that he uses to cook meals per month.

1. Using the information provided, construct a production possibilities frontier that represents the two choices that Sipho has in spending his money on either buying the R15 meals from the campus outlet and cooking the meals himself.

2. Given the production possibilities frontier constructed in 1, identity other costs that are associated with Sipho choosing to cook the meals himself as opposed to purchasing the R15 meals from the campus outlet.

Given Sipho’s monthly budget, if the price of the meals were to decrease to R7.50, Sipho would be willing to purchase 2 meals per day all other factors remaining the same.

3. Using the above information, construct a demand curve that shows Sipho’s demand for campus meals at the alternative prices over a period of a month ceteris paribus.

4. On the above diagram, illustrate the likely effect that an increase in Sipho’s allowance would have certris paribus. 5. Identify other factors that would have the same effect as that of 4. Sipho and other students realize that it is better for them to purchase the campus meals and they all start doing so.

Answer 1

1. Since Sipho approximately spends R450 per month on items that he uses to cook meals, his average expenditure per day is 450/30= R15. This is equal to the price of meals available at the campus outlet. Thus, opportunity cost is constant and the PPC will be a downward sloping straight line as shown in Panel A.

2.The other costs that are associated with Sipho's choosing to cook meals himself instead of buying them from campus outlet include his opportunity costs in terms of time and efforts invested in collecting ingredients and cooking, physical efforts in the act of cooking and emotional labor involved in decision making of meal planning.

3. Panel B shows Sipho's monthly demand curve for campus meals at alternative prices of R15 and R7.5. Ceteris Paribus, Sipho would now consume two meals a day instead of one.

4. An increase in Sipho's allowance would shift Sipho's demand curve towards right. This is so as income of the buyer increases, the demand of a normal commodity increases even if the price of the commodity remains same. This shift is shown from demand curve DD to new demand curve DD' in Panel B.

5. Other factors that would cause an increase in demand and shift Sipho's demand curve towards right include increase in price of related goods (substitute goods) and consumer trends among other factors.