a.) Sara’s income is expressed as the quantity of goods that she can afford to buy. Expressed in terms of cola, Sara’s real income is 4 cans of cola. We divide the money income $12 by the price of cola $3.
$12 / $3 = 4
b.) The same here: Expressed in terms of popcorn, Sara’s real income is 4 bags of popcorn. Again, we divide the money income $12 by the price of popcorn $3.
$12 / $3 = 4
c.) A relative price is the price of one good divided by the price of another good. The price of popcorn is $3 per bag and the price of cola is $3 per can. To find the relative price, we divide the price of cola $3 by the price of popcorn $3. So the relative price of cola is 1 bag of popcorn per can of cola.
$3 / $3 = 1
d.) Sara must give up 1 bag of cola because in this case we see that a can of cola is equal to a bag of popcorn.
e.) The budget equation starts with:
Expenditure = Income
Expenditure is equal to the sum of the price of each good multiplied by the quantity bought. - the price of popcorn
- the quantity of popcorn
- the price of cola
- the quantity of cola
Sara’s budget equation is:
PPxQP + PCxQC = Y
, or we use the prices of goods. We get:
$3QP + $3QC = $12 To find the relationship between these quantities we divide both sides of the equation by $3, and we get:
QP + QC = 4
Now, we will subtract QC from both sides to obtain:
QP = 4 – QC
(that is the equation for Sara’s budget line).
Popcorn (per week)
- Budget line
0 4 Cola (per week)
g.) To calculate the slope of a straight line, we divide the change in the value of the variable measured on the y-axis by the change of the variable measured on the x-axis. Therefore,...
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