For lunch, Misha eats only salads or fruit & yogurt smoothies. Her weekly food budget is $48. Each salad costs $8 and each smoothie costs $3. a. Draw Misha’s budget constraint. b. What is the opportunity cost of purchasing one more smoothie? What is the opportunity cost of purchasing one more salad? c. Describe intuitively how Misha should make the optimal consumption decision. d. Suppose that Misha income falls from $48 to $24. Show what happens to the budget constraint. Is it possible that Misha will consume more salad as a result of this?
Answers
Budget Constraint:
Definition: It is all possible combinations of two goods or services that can be consumed by someone, given the prices of the commodities and income of the person.
a. Given the prices of the commodities, salad= $8 and smoothie=$3 and budget= $48, the following table shows the budget constraint of Misha:
Salad (in units) Smoothie(in units)
0 16
3 8
6 0
b. The opportunity cost of buying one more salad is approximately 13 smoothies and the opportunity cost of buying one more smoothie is approximately 6 salads.
c. Misha has 3 combinations of salads and smoothies which fits her budget. If she chooses the first combination then she will have to consume 0 salads and if she chooses the third combination then she will have to consume 0 smoothies, therefore Misha should make the optimal consumption decision by choosing the second combination. This way she can have both salad and smoothie within her budget.
d. If Misha's income falls from $48 to $24, then the budget constraint curve will shift to the left as shown in the diagram.
Salad(in units) Smoothie(in units)
0 3
3 0
No, it is not possible that she will consume more salad as a result of this since 3 units of salad is the maximum she can consume, given her budget and cost of salad=$8.