10. Derlving demand from an Indifference map Dina lives in Dallas and enjoys dri

Question

10. Derlving demand from an Indifference map Dina lives in Dallas and enjoys drinking lattes and eating scones. The price of a latte is held constant at On thefollwing dlagram, the purple curves h and $4 throughout this problem. 2) represent two of Dina's indifference curves. The lines BC1 and BC2 show two budget constraints. Points X and Y show Dina's optimum consumption bundles subject to t X and Y show Dina's optimum consumption bundies subject to these budget constraints 20 18 16 14 12 10 4, 10 0 2 46 8 10 12 14 1618 20 SCONES

Explanation / Answer

Ans: Price of latte is $4 and quantity ia 10 so the budget will be

price*quantity= 4*10

= $40

At BC1, price will be 4 as we have budget of $40 and quantity is 10 so price can be find out by = budget/quantity

Consumption will be 4 quantity as I1 is tangent on BC1 at X which indicate quantity 4.

At BC2 , price will be= 2.22 ($40/18)

Consumption will be of 8 quantity (as I2 is tangent on BC2 at Y which indicate quantity 8)

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