Answer to Question #274272 in Microeconomics for Ash

Question

Kali lives on mangoes and avocados, Pm = $5, Pa = $10, and her income is $200.

A. Identify her budget constraint equation and illustrate Kali’s budget line on a graph

with mangoes on the horizontal axis and avocados on the vertical axis. (6 marks)

B. Identify and illustrate on a new graph Kali’s new budget constraint if her income

doubled, the price of mangoes doubled, and the price of avocados remained constant.

(7 marks)

C. Explain the impact on her real income when the price changed in the scenario in B

assuming income had remained constant.

Answer 1

Solution:

Let $Pm$ and $Pa$ denote the Prices of Mangoes and Avocados.

$5Pm+10Pa=200------equation1$

When the price of mangoes is doubled and his income doubled .

$!0Pm+10Pa=400-----equation 2$

The budget line for equation 1 and 2 is shown below.

The Blue line represents Kali new budget line equation 2 while the red one represents equation 1.

(c)

Kali's income remaining constant, and the price of mangoes doubling and that of avocados remaining constant will result in a lower purchasing power of his income such that, he will get less quantities of the goods. He will choose to sacrifice a unit of one good for the other depending on the good that gives his more utility.

An increase in the price of mangoes changes the slope of the budget line and intercept-X rotates it inward