Question

Bruno can spend his income on two different goods: Beyonce MP3s and notebooks for his class notes. For each of the following three situations, decide if the given consumption bundle is within Bruno's consumption possibilities. Then decide if it lies on the budget line or not. a. MP3s cost $\mathrm{\$}2$ each, and notebooks cost $\mathrm{\$}3$ each. Bruno has income of $\mathrm{\$}60.$ He is considering a consumption bundle containing $15\mathrm{MP}3\mathrm{s}$ and 10 notebooks. b. MP3s cost $\mathrm{\$}2$ each, and notebooks cost $\mathrm{\$}5$ each. Bruno has income of $\mathrm{\$}110.$ He is considering a consumption bundle containing 20 MP3s and 10 netebooks. c. MP3s cost $\mathrm{\$}3$ each, and notebooks cost $\mathrm{\$}10$ each. Bruno has income of $\mathrm{\$}50.$ He is considering a consumption bundle containing $10\mathrm{MP}3\mathrm{s}$ and 3 notebooks.

Short answer

a. 15 MP3s at $2 each and 10 notebooks at $3 each, with an income of $60. b. 20 MP3s at $2 each and 10 notebooks at $5 each, with an income of $110. c. 10 MP3s at $3 each and 3 notebooks at $10 each, with an income of $50. Answer: a. The consumption bundle is within Bruno's consumption possibilities and lies on his budget line. b. The consumption bundle is within Bruno's consumption possibilities but does not lie on the budget line. c. The consumption bundle is not within Bruno's consumption possibilities and does not lie on the budget line.

Step-by-step solution

Calculate the total cost of the consumption bundle

The total cost will be the sum of the cost of 15 MP3s and the cost of 10 notebooks. So, Cost = (15 MP3s * $2/MP3)+(10notebooks\ast$3/notebook) = $30+$30 = $60.

Compare the total cost with Bruno's income

Since the total cost of $60isequaltoBrun{o}^{\prime }sincomeof$60, the consumption bundle is within his consumption possibilities and lies on the budget line. #b. MP3s at $2each,notebooksat$5 each, income of $110

Calculate the total cost of the consumption bundle

The total cost will be the sum of the cost of 20 MP3s and the cost of 10 notebooks. So, Cost = (20 MP3s * $2/MP3)+(10notebooks\ast$5/notebook) = $40+$50 = $90.

Compare the total cost with Bruno's income

Since the total cost of $90islessthanBrun{o}^{\prime }sincomeof$110, the consumption bundle is within his consumption possibilities but does not lie on the budget line. #c. MP3s at $3each,notebooksat$10 each, income of $50

Calculate the total cost of the consumption bundle

The total cost will be the sum of the cost of 10 MP3s and the cost of 3 notebooks. So, Cost = (10 MP3s * $3/MP3)+(3notebooks\ast$10/notebook) = $30+$30 = $60.

Compare the total cost with Bruno's income

Since the total cost of $60isgreaterthanBrun{o}^{\prime }sincomeof$50, the consumption bundle is not within his consumption possibilities and does not lie on the budget line.

Key concepts

Consumption Bundle

A consumption bundle refers to the specific combination of different goods a consumer can purchase with their income. Imagine you have a fixed amount of money in your wallet, and you're in a store with multiple choices like sweets and books. The choice of how much of each item you can buy together forms your consumption bundle.

For example, in Bruno's scenario described in the exercise, he has choices between MP3s and notebooks. A consumption bundle might mean he decides to buy 15 MP3s and 10 notebooks. This pair of items represents one possible consumption bundle based on Bruno's preferences and budget.

• The bundle must be within what Bruno can afford or the bundle possibilities.
• How well a bundle fits Bruno's actual budget is analyzed next in terms of income allocation.

Income Allocation

Income allocation is all about how a consumer like Bruno decides to spend his limited income on various goods. Every consumer has a set amount of money to spend, and they need to decide how to divide this income among different purchases - this is their income allocation.

In Bruno's example, he needs to manage his income carefully across the cost of two goods: MP3s and notebooks. Understanding his total income constraint, for instance, $60, helps Bruno decide the possible number of MP3s and notebooks he can buy without exceeding his means.

• If Bruno devotes all his income precisely to make a purchase, the bundle will lie on the budget line.
• If there's leftover money after buying the bundle, it is within his consumption possibilities but under the budget line.
• If the bundle demand exceeds his available budget, it falls outside his consumption possibilities.

Proper income allocation ensures that Bruno doesn't overspend, keeping purchases within his capacity while aiming to maximize his satisfaction from both items.

Price of Goods

The price of goods significantly influences which consumption bundles are affordable for a consumer. In the given exercise, the price of each MP3 and notebook determines how many of each Bruno can buy with his set income.

Prices act as a guide to budget constraints. For instance, MP3s might cost $2 apiece, while notebooks could be $3 each. These prices dictate the total expenditure for any chosen bundle and influence how Bruno might rearrange his purchases to meet his budgetary limits.

• Bruno needs to factor in these prices when deciding which goods and how much of each to purchase.
• Cheaper goods could allow for larger quantities within the same income level, possibly increasing variety and satisfaction.
• Conversely, higher prices could limit the number of goods, thus requiring more careful income allocation decisions.

Understanding the prices of goods helps Bruno, and consumers like him, remain informed about the best way to allocate income efficiently while staying within their budget constraints.