In each of the following cases, use the equation for the budget line to de- term

Question

In each of the following cases, use the equation for the budget line to de- termine the missing value - income, a quantity, or a price. Then graph the budget constraint and identify the consumer’s chosen consumption bundle. The price of bread is $0.50 per pound and the price of butter is $0.25 per ounce. Channing spends all her income on 12 pounds of bread, 7 ounces of butter, and nothing else. (Here, you solve for income.)

The price of bread is $0.75 per pound, and the price of butter is $0.20 per ounce. Rupert’s income is $15, with which he buys 6 pounds of bread. (Here, you solve for the amount of butter.) The price of bread is $0.60 and Aaron’s income is $40. He buys 45 pounds of bread, 26 ounces of butter, and nothing else. (Here you solve for the price of butter.)

Explanation / Answer

(a) I=0.50BR+0.25BU, where BU is the quantity of butter (7) and BR is the quantity of Bread (12)

I=12*0.50+7*0.25

=6+1.75

=7.75 Because all income is spent on 12 pounds of Bread and 7 ounces of Butter

the total income will be $7.25

(b)

15=0.75BR+0.20BU (BU stands for quantity of butter consumed)

15=0.75*6+0.20*BU (15 is income, 0.75 is price of bread per pound and 0.20 is the price of butter per ounce

BU= (15-4.5)/0.20

=52.5 ounces of butter

(c)

40=0.60*45+P*26 (I=PBR*BR + Pbut*BU)

26Pbut = 40-0.6*45 (Price of bread=0.6, quantity of bread is 45 pounds and income is 40)

Pbut = (40-27)/26 =$0.50 per ounce

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