What is the original price for balloons? Four of John\'s indifference curves for

Question

What is the original price for balloons?

Four of John's indifference curves for avocados and balloons are mapped above, along with budget constraint lines UV (original) and UW (new). Points a and b represent the two points of consumer equilibrium and John's money income is S40. What is the original price of balloons? What is the original price of avocados? What is the new price of balloons? What is the new price of avocados? What happens to John's consumption of avocados and balloons when he moves to the new budget line UW?

Explanation / Answer

a) Income =40

To find price of ballons we assume there is no purchase of avacado

So Price of ballons = 40/5 = 8

b)

To find price of avacados we assume there is no purchase of ballons

So Price of avacados = 40/5 = 8

c) Now John buys 10 ballons when he does not buys any avacado

New Price ballon = 40/10 = 4

d) Now John buys 5 avacados when he does not buys any ballons

New Price avacado = 40/5 = 8

e) As per the graph, moving from point a to b consumption of avacadoa fall, while that of ballons rise.

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