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Suppose you have an income of $10, and buys soda pop and movies. The price of each good is 1. a) Write the equation of the budget line. [2 marks] b) Draw a budget line that represents the set of bundles this individual can afford if they use all their income. (Put movies on the X axis). Label the places where the budget line intercepts each axis and the slope of the line. [4 marks] c) Suppose that in consumer equilibrium this individual consumes 7 soda pops and 3 movies. What rules must hold in consumer equilibrium? Label this bundle in your drawing (call it point “A”). [3 marks] d) Draw an indifference curve associated with this bundle, and explain how its slope at the equilibrium point relates to the slope of the budget line. [3 marks] e) Consider the bundle 2 Movies and 8 Sodas. Label this point. What can you say about the slope of the indifference curve that passes through the point? (For example, is it bigger than, equal to, or smaller than -1?). [3 marks]
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