Suppose Glenn Gibbs (a native of Manchester, England) has an...

Suppose Glenn Gibbs (a native of Manchester, England) has an income of $$\$ 30$$. He derives satisfaction from the consumption of tea and biscuits. The price of tea is $$\$ 3.00$$ per cup and the price of biscuits is $$\$ 0.50 /$$ unit. a. Graphically construct the budget line for this situation. Label your axes carefully. b. Now, suppose the price of tea increases to $$\$ 5.00$$ per cup and Glenn's income remains at $$\$ 30$$. Assuming the price of biscuits remains at $$\$ 0.50 /$$ unit, redraw the budget line to reflect this situation. FIGURE CANT COPY

Suppose Glenn Gibbs (a native of Manchester, England) has an income of $$\$ 30$$. He derives satisfaction from the consumption of tea and biscuits. The price of tea is $$\$ 3.00$$ per cup and the price of biscuits is $$\$ 0.50 /$$ unit.
a. Graphically construct the budget line for this situation. Label your axes carefully.
b. Now, suppose the price of tea increases to $$\$ 5.00$$ per cup and Glenn's income remains at $$\$ 30$$. Assuming the price of biscuits remains at $$\$ 0.50 /$$ unit, redraw the budget line to reflect this situation.
FIGURE CANT COPY

Key Concepts

Budget Constraint

The budget constraint is a fundamental concept in consumer theory that represents all combinations of goods a consumer can purchase with a given income, given the prices of those goods. It shows the trade-offs a consumer faces because spending more on one good means spending less on another.

Intercepts and Slope

The intercepts of the budget line indicate the maximum quantity of one good a consumer can purchase if they spend their entire income on that good alone. The slope of the budget line reflects the rate at which the consumer can trade off one good for the other, essentially representing the opportunity cost of consuming one additional unit of a good in terms of the foregone units of the other good.

Impact of Price Changes on the Budget Line

When the price of one good changes while income and the price of the other good remain constant, the budget line pivots. This pivot alters the intercept associated with the good whose price changed, and consequently, the slope of the budget line changes, representing a new trade-off ratio between the goods. This concept is crucial for understanding how price variations affect the consumer’s choice set.

Transcript

00:01 So the price of dvd is $20 and the price of cdc is $10.

00:10 So philip has a budget of $100 to spend on the two goods.

00:20 And suppose that he already has already bought one dvd and one cd, right? in addition, there are three more dvds and five more dvds that i would like to buy.

00:31 So he bought 1d plus 1c and he wants to buy additional of 3d and 5 cities.

00:49 So the first question says, giving the above prices and income, draw his budget line on a graph with cities on the horizontal axis.

01:02 So for that question we are giving the the price of cds and the price of dvds and the budget and how much you have bought and how much is going to buy so the budget line basically shows all the possible combinations of the two goods which the person can buy with the giving out income so the equation for the budget line will be written as equation of budget line this would be equal to p d d plus p c c is equal to m so p d represents the price of good d which is d bc represents the price of good c which is c d and then d is the quantity of um good d and c is the quantity of good c and then m is the income of the consumer so yeah we can fill in the gap by saying 20 because the price is 20 for dvds.

02:11 So 20d plus 10c is equal to 100 because this budget is 100, right? so that's income.

02:21 So now we can graph that.

02:22 You can graph the budget line.

02:24 So the budget line graph is what i'm going to be drawing.

02:38 So at the x axis is the quantity of cds.

02:47 So this is c and on y axis is quantity of dvds.

02:52 So that's d so this goes all the way from zero to six zero to four six and this goes from two to ten so we have two four six eight ten right so at point five on the quantity of cities because if we divide this um by two you're pretty much going to have on two d i'm sorry, i don't think we need to do that.

03:47 But on the point of five quantity of dvds and, yeah, it's 3d plus 5c additional.

04:00 So on point of five quantity of dvds and 10 quantity of cds, we're going to draw a budget line.

04:13 So that is basically the budget line.

04:22 So now moving on, the second question.

04:28 And this says considering what he has already purchased and what he still wants to purchase, identify the three different bundles of cds and dvds, the three different bundles of cds and dvds that i could choose.

04:56 And for this part of the question, as in that, he cannot purchase fractional units.

05:03 So it has one dvd and one.

05:06 City purchased already so it has one dvd and one city purchased already and his income is equal to hundred dollars right so the income left after purchasing um after the income left to be seventy dollars after spending thirty dollars on while giving the price of d and the price of of c so d is twenty dollars and c is ten dollars so ten dollars so ten dollars so ten 20 plus 10 is 30 dollars so his income is 100 dollars so the income that will be left after spending 30 dollars would be 70 dollars income left would be 100 minus 30 and that's 70 dollars right so the income left after spending 30 dollars on purchase of one unit of each of them is 70 now it wants to buy he wants to buy three and 5c and suppose that he buys more 3d's right the income is spent is 60 because for d for 3d is 3 multiplied by the price of d which is $20 and that would be equals to $60 right so if he has $70 left income the income with the $60 it was only have um 10 dollars left so you have 70 dollars minus the 60 dollars for c for for dvdies and then you have 10 dollars left so mind you this 10 dollars left he still needs to buy five cds and that definitely cannot be enough because for five cities once they cost 10 he needs at least $50 to buy the cds and he has 10 dollars left so you can only buy one cd you can only buy one cd now suppose that it buys two units of dvds instead we do many seven dollars instead of buying three units so if he buys two d instead of three ds then the income that we spend will be equal to two multiplied by twenty dollars each of them and then this would be $60.

08:22 I'm sorry, that will be $40.

08:26 So it has $70, right? and he spends $40...

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