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Farah Has US$100 to Spend Each Month on Bread and Chicken

Question 32

Essay

Farah has US$100 to spend each month on bread and chicken. Suppose the price of bread is US$4 a loaf and the price of chicken is US$5 per kilo.
a. Draw her budget constraint and label it BC0. Put Loaves of bread on the horizontal axis and Chicken (kilos) on the vertical axis. Be sure to identify the intercept values.
b. Suppose Farah is a utility maximizer and she consumes 10 loaves of bread and 12 kilos of chicken. On the same graph you drew in part (a), draw an indifference curve to identify her optimal bundle. Label this bundle "E".
c. Is her budget exhausted? Explain your answer.
d. Suppose Farah's income falls so that she can now spend US$80 each month on the two goods. Prices however remain unchanged. In the same diagram, graph her new budget contraint and label it . Be sure to identify any new intercept values.
e. Following the change in income, can Farah consume the same bundle "E"? Explain your answer.
f. What must happen to her total utility following the decrease in her income?

Correct Answer:

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a. Please see the figure below.
b. Pleas...

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