Consider the budget constraints below. These constraints represent the market ba

Question

Consider the budget constraints below. These constraints represent the market baskets that Edith can afford to buy at alternative: a. levels of income b. prices of goods X and Y c. preferences over goods X and Y d prices of good X e. prices of good Y Jamie is considering the purchase of a new car for $20, 000. Her income is $60, 000. and her alternative is "all other things.' which sell for $1 each. If all other things are plotted on the vertical axis and her marginal rate of substitution is. then she will buy car(s). a. 15.000: 3 b. 15.000: 2 c. 15.000:0 d 15.000:1 e. 1/15.000: 3 Consider the budget constraint below. Dennis spends all his money on sweaters and sweatshirts. If the price of sweaters is S15. how much money does Dennis have in his budget? Sweaters a. §7 b. $75 c- $105 d. $178 e none of the above

Explanation / Answer

1. (a) levels of income

Increase in income shifts the budget line rightwards. When income of person increases then, he/she is able to purchase more of both goods in the market.

3. Price of sweater = $ 15

Dennis purchased 7 sweaters so, total expenditure on purchasing sweaters = 15 X 7 = $ 105

Dennis also purchased 5 units of sweatshirts, if say price is same i.e. $ 15, then total expenditure on sweatshirts = 15 X 5 = $ 75

Dennis budget = $ 105 + $ 75 = $ 180

Therefore, answer is e) None of the above

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