Question

For lunch, Wendy eats only salads or fruit & yogurt smoothies. Her weekly food budget is $100. Each salad costs $5 and each smoothie costs $10.

a. Draw Wendy’s budget constraint.

b. What is the opportunity cost of purchasing one more smoothie? What is the opportunity cost of purchasing one more salad?

c. If the price of smoothies doubles to $20, what happens to Wendy’s opportunity set?

d. Describe intuitively how Wendy should make the optimal consumption decision.

Answer 1

a.) Wendy's Budget Constraint

Equation

5x+10y<100

See attached

b.) Opportunity cost

One more smoothie-18 salads

One more salad-9.5 smoothies

c.) Smoothies quantity purchased will decrease. The set will be altered.

d.) Wendy should choose any combination along the budget line as it will satisfy her utility.