Question

An hypothetical consumer is faced with the budget constraint specified as Y=3A + 4B, where Y= money income, A= quantity of commodity A and B is the quantity of commodity B consumed ( price of A and B in #).

(A) from the budget constraint; state:

(I) the price of commodity A

(ii) the price of commodity B

(B) given that the money income Y= #1,200

(I) sketch the budget line with commodity A on the horizontal axis and commodity B on the vertical axis ;

(ii) Determine the quantity of A if 60 units of B is consumed.

(iii) Determine the amount of money income unspent if 100 units of A and 80 units of B are consumed.

(iv) determine the extra amount of money the consumer will need to purchase 250 units of each commodity

Answer 1

A

I Price of A is 3

II Price of B is 4

B

 I

 

II Y =1200

Y = 3A+4B

Substituting Y into the budget constraint

1200=3A+4B

But A = 60 units

1200= 3(60) + 4B

1200-180 = 4B

1020=4B

B= 255 units

III

Y = 3A+4B

A=100; B= 80

Y = 3X100 + 4 X 80

Y=620

IV

Y = 3A+4B

Y= 3X255 + 4 X 255

Y = 1785

Extra income 1785 -1200

y = 585