Assignment 1 - Limits, Alternatives, and Choices PDF

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Limits, Alternatives, and Choices...

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Assignment #1 Suppose you won $15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost $0.75 each while bags of peanuts cost $1.50 each. 1.

2.

Construct a table showing the alternative combinations of the two products that are available. Number of Candy Bars

0

2

4

6

8

10

12

14

16

18

20

Number of Bags of Peanuts

10

9

8

7

6

5

4

3

2

1

0

Plot the data in your table as a budget line in a graph. What is the slope of the budget line? What is the opportunity cost of one more candy bar? Of one more bag of peanuts? Do these opportunity costs rise, fall, or remain constant as additional units are purchased? 12

Bags of Peanuts

10

8

6

4

2

0 0

5

10

15

20

Candy Bars

Slope = (0-1)/(20-18) = -1/2 or -0.5 The slope of the budget line in -0.5. The opportunity cost of one more candy bar is half of a bag of peanuts. The opportunity cost of one more bag one peanuts is 2 candy bars. These opportunity costs remain constant as more units are purchased. 3.

Does the budget line tell you which of the available combinations of candy bars and bags of peanuts to buy?

The budget line does not tell a consumer which of the available combinations of candy bars and bags of peanuts to buy but rather it lets the consumer know what the possible options are and he/she can decide for themselves what to buy. Suppose that you had won $30 on your ticket, not $15. Show the $30 budget line in your diagram. Has the number of available combinations increased or decreased? 25

20

Bags of Peanuts

4.

15 $15 Budget 10

$30 Budget

5

0 0

5

10

15

20

25

30

35

40

Candy Bars

The number of available combinations has increased because the amount of money that a consumer can spend has increased, allowing the consumer to buy more candy bars and bags of peanuts....