You will gain welfare from consuming bread and chocolate. Your welfare is described numerically by W = 4B + 2C, where B denotes the quantity of bread you choose to consume, and C denotes the quantity of chocolate, and W denotes your welfare level.

(a) You have $20 to spend on bread and chocolate. The price of chocolate is $2 per unit, and the price of bread is $1 per unit. Draw your budget constraint, and an indifference curve depicting your welfare level when you optimise. How much chocolate will you buy?

(b) If the price of chocolate increases to $4, does this affect how much chocolate you buy? Does it affect your budget line?  

(c) Given that bread costs $1, how low must the price of chocolate be before you start buying any chocolate?

Posted Date: 4/1/2013 3:23:36 AM | Location : United States

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