Doris goes to the bookstore to buy stationary. She wants pencils and paper. The

Question

Doris goes to the bookstore to buy stationary. She wants pencils and paper. The price of paper is 0.1 cents per sheet, and the price of a pencil is 18 per pencil. Dispel your disbelief and assume that both pencils and sheets of paper can be purchased in arbitrary non-negative quantities, so that the consumption set is . Doris has 208 of wealth to spend on pencils and paper. Draw Doris's budget set in an appropriate diagram. (Hint: Be careful, not all prices are being given in the same units. First convert everything into the same units). What is the slope of the budget line? Write an equation describing the budget line.

Explanation / Answer

Definition: The budget set is the set of bundles of goods an agent can afford. This set is a function of the prices of goods and the agents endownment. Assuming the agent cannot have a negative quantity of any good, the budget set can be characterized this way. Let e be a vector representing the quantities of the agent's endowment of each possible good, and p be a vector of prices for those goods. Let B(p,e) be the budget set. Let x be an element of R+L; that is, the space of nonnegative reals of dimension L, the number of possible goods

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