Answer to Question #264093 in Microeconomics for Star

Question

If Veronica Vaughn spends all of her daily income on cigarettes and Yoo Hoo, she can afford 10 packs of cigarettes and 10 bottles of Yoo Hoo. She can also afford 6 packs of cigarettes and 22 bottles of Yoo Hoo.

(a)  What is the relative price of cigarettes in terms of bottles of Yoo-Hoo (i.e, what is the ratio of prices, Pc/Py?)

(b)  Exactly how much income does Veronica earn in one week if the price of cigarettes is $6? Write a budget equation for Veronica that is a function of the pack of cigarettes, C, and the number of bottles of Yoo Hoo, Y.

(c)  Draw veronica’s daily budget set with packs of cigarettes on the x-axis and bottles of Yoo Hoo on the y-axis.

Answer 1

Solution:

a.). Budget constraint: PcC + PyY = M

M = Income

10Pc + 10Py = M

6Pc + 22Py = M

4Pc – 2Py = M

4Pc = 2Py

2Pc = Py

Py = 2Pc

Price ratio = $\frac{Pc}{Py} = \frac{Pc}{2Pc} = 2$

 

b.). PcC + PyY = M

Pc = 6

60 + 10Py = M

36 + 22Py = M

24 – 12Py = 0

24 = 12Py

Py = 2

M = PcC + PyY

M = 6(10) + 2(10) = 60 + 20 = 80

Income (M) = 80

 

c.). Veronica’s budget set is drawn as below: