seminar-type classess for сФ305

Здравствуйте 

Hello

Anass el fatimi

1) What does the budget line represent in terms of consumer choices when income and prices are fixed?

The budget line represents all possible combinations of two goods that a consumer can purchase when spending their entire income, given fixed prices. It shows the boundary of affordable consumption choices - any combination on the line uses up the consumer's full budget.

2) How does an increase in income affect the position of the budget line?

An increase in income causes a parallel outward shift of the budget line. This means the consumer can now afford more of both goods, but the slope of the line (which represents the trade-off between goods) remains unchanged since relative prices haven't changed.

3) What happens to the budget line if the price of one of the goods changes while income remains constant?

If the price of one good changes, the budget line pivots around the intercept of the other good. For example, if Good X becomes more expensive, the X-intercept moves inward (you can buy less of X with your income), while the Y-intercept stays the same. This changes the slope of the budget line.

4) Why are some combinations of goods above or below the budget line considered unattainable or inefficient?

Combinations above the budget line are unattainable because they cost more than the consumer's income - the consumer cannot afford them. Combinations below the budget line are inefficient because the consumer isn't using their full income, meaning they could purchase more goods and achieve greater satisfaction.

5) Why does a budget line slope downward?

A budget line slopes downward because of the trade-off between goods given a fixed budget. To buy more of one good, the consumer must give up some amount of the other good. This negative relationship (more of X means less of Y) creates the downward slope.

6) How can understanding the slope of the budget line help consumers make decisions about purchasing two different goods?

The slope of the budget line shows the rate at which one good must be traded for another - this is the opportunity cost. Understanding this helps consumers evaluate whether trading one good for another is worthwhile based on their preferences. The slope reveals how many units of one good must be sacrificed to obtain one more unit of the other good.

2. Mary's Budget Problem

Equation: 2B + 10K = 100 (where B = bread loaves, K = books)

Maximum bread: 50 loaves (if she buys no books)

Maximum books: 10 books (if she buys no bread)

Opportunity Costs:

Opportunity cost of 1 book = 5 loaves of bread

To buy one $10 book, Mary must give up buying 5 loaves of $2 bread

Opportunity cost of 1 loaf of bread = 0.2 books (or 1/5 of a book)

To buy one $2 loaf, Mary must give up 0.2 of a $10 book

Would opportunity cost change if prices doubled?

No, the opportunity cost would NOT change. If both prices double (bread = $4, books = $20), the opportunity cost of a book would still be 5 loaves of bread ($20 ÷ $4 = 5), and the opportunity cost of bread would still be 0.2 books ($4 ÷ $20 = 0.2).

This is because opportunity cost depends on relative prices (the ratio between prices), not absolute price levels. When both prices change by the same proportion, their ratio remains constant, so the trade-off between goods stays the same. However, Mary's purchasing power would decrease - she could only afford 25 loaves maximum or 5 books maximum instead of 50 loaves or 10 books.

Good bye