Question

Suppose that you initially have 100 dollar to spend on books or movie tickets. The books start off costing 25 dollar each and the movie tickets start off costing 10 dollar each. For each of the following situations, would the attainable set of combinations that you can afford increase or decrease? a. Your budget increases from 100 to 150 dollar while the prices stay the same. b. Your budget remains 100 dollar, the price of books remains 25 dollar but the price of movie tickets rises to 20 dollar c. Your budget remains 100 dollar, the price of movie tickets remains 10 dollar, but the price of a book falls to 15 dollar

Short answer

In Scenario A, the set increases; in Scenario B, the set decreases; in Scenario C, the set increases.

Step-by-step solution

Analyze Initial Situation

You have \(100 to spend. Books cost \)25 each, and movie tickets cost $10 each. The equation for your budget is \( 25B + 10M = 100 \), where \( B \) is the number of books and \( M \) is the number of movie tickets.

Situation A - Budget Increase

Your budget increases to $150. The budget equation changes to \( 25B + 10M = 150 \). With a higher budget, you can afford more combinations of books and movie tickets, thus increasing the attainable set.

Situation B - Increase in Movie Ticket Price

The price of movie tickets increases to \(20, while your budget remains \)100 and the price of books remains $25. Your budget equation becomes \( 25B + 20M = 100 \). This limits the number of movie tickets you can afford, decreasing the attainable set of combinations.

Situation C - Decrease in Book Price

The price of books decreases to \(15, with your budget staying at \)100 and the price of movie tickets at $10. The budgetary equation is \( 15B + 10M = 100 \). You can now afford more books, increasing the attainable set of combinations.

Key concepts

Opportunity Cost

Opportunity cost is a fundamental idea in economics, representing the benefits you forgo when choosing one option over another. In the context of your budget constraints, this concept helps explain the trade-offs in consumer choices.
Imagine you have $100 to spend, and the price of a book is $25, while a movie ticket costs $10. The opportunity cost of choosing a book is the number of movie tickets you cannot buy because your budget will be reduced by $25. In this case, for each book you purchase, you forgo the opportunity to buy 2.5 movie tickets.

• The opportunity cost of one book is 2.5 movie tickets.
• The opportunity cost of a movie ticket is 0.4 books.

Understanding opportunity cost is key to making informed consumer choices, as it highlights what you're sacrificing whenever you make a purchase.

Consumer Choice

Consumer choice refers to the decision-making process individuals go through when selecting between different combinations of goods and services within their budget constraints. In your initial situation, you have \(100, books cost \)25, and movie tickets are $10, which limits your choices. The budget equation, \( 25B + 10M = 100 \), represents all possible combinations of books (B) and movie tickets (M) that you can afford.
Consider the possible combinations:

• 4 movie tickets and 3 books.
• 10 movie tickets and no books.
• 4 books and no movie tickets.

Each point on the budget line represents a specific combination of these goods. Consumer choice involves selecting which combination provides the greatest satisfaction, given the constraints of available budget and prices. Individuals typically strive to maximize their utility, or happiness, from their spending decisions.

Price Change Impact

Changes in the price of goods can significantly affect your buying power and the range of possible choices available to you. A price change will cause the budget line to pivot and shift, altering the attainable set of combinations.
Let's explore how changes in price affect your situation:

• When the price of movie tickets increases from $10 to $20, you can afford fewer of them, decreasing the attainable set.
• If the price of books decreases from $25 to $15, you can now buy more books for the same budget, hence increasing your attainable set and options.

Price changes define a new budget constraint, altering your buying decisions and the opportunity costs associated with them. This highlights the dynamic nature of consumer choices, reflecting how individuals must continuously adjust their budgetary decisions in response to changing market conditions.