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

question 131

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 maximiser 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 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?

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Definitions:

Equivalent Interest Rate

The interest rate that gives the same compounded financial outcome as other rates calculated over different time periods.

Nearest 0.01%

Rounding off a numerical figure to the closest one hundredth of a percent.

Equivalent Interest Rate

A rate that provides the same accumulated interest as would be obtained from several other interest rates over a given time period.

Nearest 0.01%

Adjusting a value so that it is close to an exact hundredth of a percent, enhancing precision.