0scar consumes two goods, wine and cheese. His weekly income is $500. a. Describ
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Question
0scar consumes two goods, wine and cheese. His weekly income is $500.
a. Describes Oscar's budget constraint under the following conditions:
i. Wine cost $10/bottle, cheese costs $5/pound;
ii. Wine costs $10/bottle, cheese cost $10/pound;
iii. Wine costs $20/bottle. cheese costs $10;
iv. Wines costs $20/bottle. cheese costs $10/pound, but Oscar's income increases to $1,000/week
b. Describe why budget constraints ii and iii will probably provide less utility than does budget constraint i. Are there any situations where this would not be the case?
c. Describe why budget constraint iv provides precisely the same options to Oscar as does budget constraint i. What income (in euros) would Oscar need if he is to afford these same options if wine cost 15 euros per bottle and cheese costs 7.50 euros per pound? How a but a situation in Engalnd where wine costs 4 per bottle and cheese cost 2 per pound? What general conclusions can you draw by comparing all the budget constraints mentioned in this part?
Explanation / Answer
Oscar's weekly income is $500.
a) So for
i) He can use all 500 to buy either 50 bottles of wine or 100 pounds of cheese.
ii) He can use all 500 to buy either 50 bottles of wine or 50 pounds of cheese.
iii) he can use all 500 to buy either 25 bottles of wine or 50 pounds of cheese.
iv) he can with 1000 buy either 50 bottles of wine or 100 pounds of cheese; same as he could in case (i).
b)
As you can see now in cases ii) and iii) Oscar is getting less in terms of the items he can buy. This implies that the amount of satifaction that he could get earlier noe diminshes. So his utility falls. It can be the opposite in cases of giffen or inferior goods.
c) As you can see the maximum Oscar buy remains the same in both case (i) and case (iv). So the amount of satisfaction that he gets also remains the same in both cases and the hence the utility in same in both the cases.
At the cost of 15 euros to buy 50 bottles of wine Oscar would need 15*50 = 750 euros a week. (Since the ratio of the cost of wine to cheese remains the same we can just get the figure by using the cost of wine)
Again in pounds. At 4 pounds a bottle he needs to earn 50*4 = 200 pounds.
What can be drawn from this is that prices of goods around the world on a average tend to be in the same ratio and that to compare income and prosperity it is better to see what and how the money can buy than directly comapring the exchage rates of currencies.
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