Pocket money of £5 may be spent on either ice-cream or soft
drinks. Ice-cream costs 12p per unit...

Question

Pocket money of £5 may be spent on either ice-cream or soft
drinks. Ice-cream costs 12p per unit while drinks cost 20p per unit.

(a) Write down the equation of the budget constraint. Graph
the constraint.

(b) Show by calculation, and graphically, how the budget
constraint changes if the price of ice-cream drops to 9p, while pocket money
and the price of drinks do not change.

(c) Show by calculation, and graphically, how the budget
constraint changes if the price of soft drinks increase to 25p, while pocket
money and the price of ice-cream do not change.

(d) If pocket money increases to £7.50, and the prices of
ice-cream and drinks remain the same, how does the budget constraint alter?
Graph the new budget constraint.

Prince · Accepted Answer

a. Let x be no. of ice-cream and y be no. of soft drinks
Budget Constraint Equation:
	12x + 20y = 500; or 
	3x + 5y = 125; or
	5y = 125 – 3X; or
	y = 25 – 0.6x
To Graph the constraint, we will calculate y at x = 0;  y = 25 and x at y = 0; x = 41.67
b. Ice cream price decreased to 09p per unit, so higher units of ice-cream are affordable. This will cause the x-intercept to increase towards the origin or, in other words, the budget line pivots upwards from the unchanged vertical intercept.

Pocket money of £5 may be spent on either ice-cream or soft drinks. Ice-cream costs 12p per unit while drinks cost 20p per unit. (a) Write down the equation of the budget constraint. Graph the...

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