Figure 10-9
-Refer to Figure 10-9.If the consumer has $240 to spend on DVDs and CDs,what is the price of a DVD if the budget constraint is BC₁?

Question

Figure 10-9 -Refer to Figure 10-9.If the consumer has $240 to spend on DVDs and CDs,what is the price of a DVD if the budget constraint is BC₁?

Quizplus · Accepted Answer

The slope of the budget constraint represents the opportunity cost of DVDs in terms of CDs. The slope is (240-0)/(0-12)= -20. This means for each DVD purchased, the consumer must give up the opportunity to purchase 2 CDs (since the price of a CD is $10). The optimal choice will be where the budget constraint intersects with the indifference curve. In this case, it would be at point A, where the consumer purchases 8 DVDs and 4 CDs. At this point, the consumer spends $160 on DVDs (8 DVDs x $20 per DVD) and $80 on CDs (4 CDs x $10 per CD), which maximizes utility within the budget constraint.

Figure 10-9 -Refer to Figure 10-9.If the Consumer Has $240 to Spend