Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of a music CD is $18 and the price of a DVD is $18.
a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs?
b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a DVD?
c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side of the equation.
d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's budget line? What determines its magnitude?

Question

Quizplus · Accepted Answer

The Answer of Olivia's income is $216 a year and she spends all of it on music CDs and movies on DVDs. The price of a music CD is $18 and the price of a DVD is $18.
a) What is Olivia's real income in terms of CDs? What is her real income in terms of DVDs?
b) What is the relative price of a CD in terms of DVDs? What is the opportunity cost of a DVD?
c) Calculate the equation for Olivia's budget line. Place the quantity of DVDs on the left side of the equation.
d) Draw a graph of Olivia's budget line (with CDs on the horizontal axis). What is the slope of Olivia's budget line? What determines its magnitude?

Olivia's Income Is $216 a Year and She Spends All