William, a tough LA attorney, spends all his income on two goods: Xerox copies (

Question

William, a tough LA attorney, spends all his income on two goods: Xerox copies (x) and yo-yos (y). His income is $40. Assume that Xerox copies cost $2 each and yo-yos cost $8 each. Is the bundle (x, y) = (15, 2) inside William’s opportunity set?

2. William, a tough LA attorney, spends all his income on two goods: Xerox copies (x) and yo-yos (y). His income is $40. Assume that Xerox copies cost $2 each and yo-yos cost $8 each. If the price of yo-yos increases to $20, the slope of William’s budget constraint will become ...?

Explanation / Answer

Budget line: Income (M) = x.px + y.py

(1) m = $40, px = $2, py = $8

When x = 15 and y = 2, Total cost = $2 x 15 + $8 x 2 = $(30 + 16) = $46

Since total cost of this bundle exceeds total budget of $40, this is not inside opportunity set.

(2) When py = $20, New budget constraint:

$40 = $2x + $20y

40 = 2x + 20y, or

20 = x + 10y [Dividing both sides by 2]

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