Topics: Addition, Analytic geometry, Price Pages: 2 (395 words) Published: February 12, 2012
1.
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= PP
- the quantity of popcorn= QP
- the price of cola= PC
- the quantity of cola= QC
-
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).

f.)

Popcorn (per week)

4
- Budget line

Affordable Unaffordable

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,...