Suppose a consumer spends her income on two goods: music CDs and DVDs. The price of a CD is $8, and the price of a DVD is $20. If we graph the budget constraint by measuring the quantity of CDs purchased on the vertical axis and the quantity of DVDs on the horizontal axis, what is the slope of the budget constraint?

Question

Quizplus · Accepted Answer

The slope of the budget constraint is calculated as the ratio of the price of the good on the vertical axis (CDs) to the price of the good on the horizontal axis (DVDs), with a negative sign. Thus, the slope = -($8/$20) = -0.4. However, since the question asks for the slope when CDs are on the vertical axis and DVDs on the horizontal axis, and considering the typical representation of a budget constraint, the correct calculation should consider the negative price ratio of CDs to DVDs, leading to a mistake in the initial explanation. The correct interpretation for the slope, given the prices, should reflect the trade-off between the two goods, indicating how many CDs must be given up to afford an additional DVD, or vice versa. Given the prices, the slope should indeed represent the trade-off rate between CDs and DVDs, which is not directly represented by the options provided, pointing to a misunderstanding in the initial explanation provided. The correct slope, in economic terms, would be the price of CDs divided by the price of DVDs, indicating the rate at which the consumer can substitute DVDs for CDs, but the options given and the explanation do not align with this economic principle correctly. Therefore, the correct answer should reflect the trade-off between CDs and DVDs based on their prices, but a reevaluation of the explanation and the options provided is necessary to accurately determine the slope of the budget constraint.

Suppose a Consumer Spends Her Income on Two Goods: Music