Q budget constraint suppose that there exists two goods in

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Q. Budget Constraint: Suppose that there exists two goods in the economy: soybeans (S) and textiles (T) and their prices are given by PS and PT , respectively.

(a) Suppose that the nominal prices are PS = 5 and PT = 2. What is the relative price?

(b) Now suppose that a farmer can produce 20 units of soybeans. Draw his budget constraint in terms of S and T. What is the slope of the budget constraint and how does it relate to the relative price?

(c) The price of soybeans falls to $4 per unit. What is the new relative price? Draw the farmers new budget constraint in terms of S and T. Is the farmer better or worse than before?

Reference no: EM13354127

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