If a household has an income of $40 and buys only bus rides at $2 each and magazines at $4 each, what is the equation of the household's budget line?
What will be an ideal response?
The budget equation states that a household's spending must equal its income. The budget equation is derived for two goods, bus rides and magazines. The amount spent on bus rides is (Pbus ride)×(Qbus ride), the amount spent on magazines is (Pmagazine)×(Qmagazine), and the consumer's income is y. We know that (Pmagazine)×(Qmagazine) + (Pbus ride)×(Qbus ride) = y. Rearrange this equality by subtracting the amount spent on bus rides from both sides to give (Pmagazine)×(Qmagazine) = y – (Pbus ride)×(Qbus ride). Finally, divide both sides by the price of magazine to give the budget equation Qmagazine = y/Pmagazine – (Pbus ride /Pmagazine)×(Qbus ride). Substituting in our values, y = $40, P bus ride = $2 and P magazine = $4, gives Qmagazine = $40/$4 – ($2/$4)×(Qbus ride) which is equal to Qmagazine = 10 – 0.5 Qbus ride
You might also like to view...
The natural rate of unemployment is defined as the rate of unemployment that
A) exists only during periods of recession or depression in the economy. B) exists due to welfare and unemployment benefits that reduce potential workers' incentives to find work. C) prevails in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy. D) prevails in the short-run macroeconomic equilibrium, before workers and employers have had a chance to adjust to an economic shock.
Negative externalities might be reduced by creating new rights, which we would describe as ________
A) adjudication B) remuneration C) legislation D) substantiation E) reparation