Question

Suppose that you initially have \(100 to spend on books or movie tickets. The books start off costing \)25 each, and the movie tickets start off costing \(10 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, while the prices stay the same.

b. Your budget remains \)100, and the price of books remains \(25, but the price of movie tickets rises to \)20.

c. Your budget remains \(100, and the price of movie tickets remains \)10, but the price of a book falls to $15.

Short answer

1. The attainable set of combinations would increase.
2. The attainable set of combinations would decrease.
3. The attainable set of combinations would increase.

Step-by-step solution

Explanation for part (a)

The budget of the consumer increases from $100 to $150. The increase of $50 in the budget will allow the consumer to buy more quantities of both the goods. The budget line will shift to the right.

Explanation for part (b)

With a new price of $20, the consumer can buy a maximum of 5 movie tickets with a budget of $100. At the previous price of $10, the consumer could buy a maximum of 10 movie tickets with the same budget.

It shows that the new price level of movie tickets has decreased the maximum set of combinations they can buy.

Explanation for part (c)

At the new price of $15, the consumer can buy a maximum of 6 books with a budget of $100. At the previous price of $25, the consumer could buy a maximum of 4 books with the same budget.

It shows that the new price level of books has allowed the consumer to buy a higher quantity of books. It would increase the maximum set of combinations that they can buy.