Assume that you have a budget of $25 to spend on milk and cereal only. The price of milk is Pm =...

Question:

Assume that you have a budget of $25 to spend on milk and cereal only. The price of milk is Pm = $4.00 and the price of cereal is Pc = $5.00.

1. Graph the budget constraint. Be sure to put the quantity of milk (Qm) on the horizontal axis.

2. What is the most you can purchase of cereal?

3. If you purchase 2 units of cereal (Qc), then how many units of milk can you purchase at most?

4. What is the slope of the budget constraint? (Note: it is important that you answer question 1 correctly and put Qm on the horizontal axis.)

5. What is the opportunity cost of the three units of cereal?

Budget Constraint:

Budget constraint is the combinations all possible consumption bundles which a consumer can afford given his level of income and prices of the goods. General equation of a budget constraint:

{eq}P_x.X + P_y.Y = M {/eq}, where Px and Py are price of good X and good Y respectively and M is consumer's income.

Answer and Explanation: 1

Become a Study.com member to unlock this answer!

View this answer

Required Budget Constraint :

{eq}4M + 5C = 25 {/eq}

1.

Budget constraint showing milk on X-axis and cereal on Y-axis

2. The most I can...

See full answer below.


Learn more about this topic:

Loading...
Utility Maximization: Budget Constraints & Consumer Choice

from

Chapter 3 / Lesson 2
12K

Learn about utility maximization. Discover various types of utility, examine utility maximizing rules, and study examples of maximizing utilities in economics.


Related to this Question

Explore our homework questions and answers library