The price of coffee is =$4 and price of cake is = $5. so, the budget line is 4c+5k=40 where, c= coffee and k =cake If coffee is placed at x axis the cake on the y axis
a) Joe's budget constraint and draw a clearly labelled diagram to depict this information which is attached in the answer
b) The equation the budget constraint for Joe for his coffee (C) and
cake (K) consumption. His income is 10, the price of cake is $2 and
the price of coffee is $1.
Income= 1C + 2D
c) On the graph above with cake on the vertical axis and coffee of the
horizontal axis draw the budget line. Hint: figure out where the budget line hits
each axis (so if K is zero what is C, if C is zero what is K), then connect the
points. Label this BL1 on your graph and give the numbers where the budget line hits both axis.
The budget line is 10= 1C + 2K, see above graph for line. Note when K is zero, C is 10.
When C is zero K is 5. This tells us where the budget line hits the two axis.
C). Now the price of coffee goes up to $2, draw a second budget line on the graph
that reflects the price change. Label it BL2. You can use the same graph but make
sure you label your budget lines!
See above graph for line. BL2 is rotated in as only the price of coffee changes. The
budget line hits the K axis at the same spot and the line rotates in because Joe can now
buy less coffee with his $10.
II-Is he better or worse off now?
. Now Joe receives a pay raise and his income is now $15. The price of cake
and coffee is still $2 each. Draw a third budget line to reflect the income raise.
Label this BL3.
BL2 shifts out in a parallel fashion to BL3, see above graph so he is worse off condition.
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