Farah Has $100 to Spend Each Month on Bread and Chicken

question 192

Essay

Farah has $100 to spend each month on bread and chicken. Suppose the price of bread is $4 a loaf and the price of chicken is $5 per pound.
a. Draw her budget constraint and label it BC₀. Put bread on the horizontal axis and chicken on the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 pounds of chicken. On the same graph you drew in part (a), draw an indifference curve to identify her optimal bundle. Label this bundle "E."
c. Is her budget exhausted? Verify your answer.
d. Now suppose Farah's income falls to so that she can now devote $80 to the two goods. Prices however remain unchanged. In the same diagram, graph her new budget constraint and label it BC₁. Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your answer.
f. What must happen to her total utility following the decrease in her income?

---

Definitions:

Purely Competitive

Describes a market structure where many small firms compete against each other, with no single entity able to control the market price.

Marginal Cost

The cost of producing one additional unit of a good, capturing how production costs change with the level of output.

Efficiently Allocated

A state where resources are distributed in a manner that maximizes the net benefits to society.

Marginal Revenue

The surplus income generated by a company through the sale of one extra unit of a good or service.