Question

42. Consider a world in which there are only two goods. An individual has an income of $9,000, the price of deodorant is $3 per bottle, and the price of mouthwash is $2 per bottle.

i) Expressing deodorant as the dependent variable, where the equation for the budget constraint.
ii) What is the slope of the budget constraint?
iii) If the price of mouthwash increases to $4, write the new equation for the budget constraint.

Answer 1

(i)

$I = income$

$x,y$ (variable)

$P_{x}$ is the price of deodorant

$P_{y}$ is the price of mouthwash

$I=P_{x}\times X+P_{y}\times Y$

$I=900$

$P_{x}=3$

$P_{y}=2$

$9000=3x +2y$

(ii) The budget constraint slope is negative as consumer must give up some of one good to obtain more of the other good

(iii) $9000=3x+4y$