Suppose the only two goods that Brett consumes are wine and cheese.When wine sells for $10 a bottle and cheese sell for $10 a pound,he buys 6 bottles of wine and 4 pounds of cheese - spending his entire income of $100.One day the price of wine falls to $5 a bottle,and the price of cheese increases to $20 a pound,while his income does not change.If you illustrate wine on the vertical axis and cheese on the horizontal axis,then
A) the slope of Brett's budget has not changed.
B) the slope of Brett's budget constraint is flatter at the new prices.
C) the slope of Brett's budget constraint is steeper at the new prices.
D) Brett's budget constraint has shifted in a parallel fashion to the budget constraint with the old prices.

Question

Quizplus · Accepted Answer

The slope of Brett's budget constraint is the ratio of the prices of wine and cheese. Initially, the slope was $10/$10 = 1. After the change in prices, the slope is $5/$20 = 0.25. This means that for every unit of wine Brett wants to buy, he now has to give up 0.25 pounds of cheese, compared to 0.5 pounds before. Therefore, the new budget constraint is steeper, and option C is correct.

Suppose the Only Two Goods That Brett Consumes Are Wine