Question

2) Suppose your weekly income is $1,000. The price of a restaurant meal is $40, and the price of a gallon of gas is $2.50. On the graph below, draw the Budget Line for Restaurant Meals and Gas. Be sure to include the x- and y-intercepts. Indicate where the utility maximizing point is using Indifference Curves. a. Suppose the price of a gallon of gas decreases to $2.15. The price of a Restaurant Meal and weekly income remain the same as above. On the same graph below, draw the new Budget Line corresponding to the change in price. Indicate where the new utility maximizing point is using Indifference Curves. Restaurant Meal Gas

Answer 1

Original budget line equation-BL1:

1000= 40* Restaurant meal+ 2.5* Gas

X intercept= 1000/2.5= 400

Y intercept= 1000/40= 25

New Budget line equation-BL2:

1000= 40* Restaurant meal + 2.15* Gas

X intercept= 1000/2.15= 465.116

Y intercept= 1000/40= 25

We assume the usual shape of indifference curve. Since utility function is not given. The exact optimal bundle cannot be determined.

25 20 15 R10 IC2 5 BL1 BL2 400 50 200 600 0 100 250 300 350 450 S00550 465.116 150 Gas -5 50 LO Restaurant meals