Answer to Question #264461 in Microeconomics for Jojo

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.

1. What is the relative price of cigarettes in terms of bottles of the yoo - hoo ( ie what is the ratio of prices Pc/ Py)

2. Exactly how much income does Veronica earn in one week if the price of cigarettes is $6? Write down the budget equation for Veronica that is a function of the packs of cigarettes C,and the number of bottle of yoo- hop, Y.

Answer 1

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