Question

Bruno can spend his income on two different goods: Beyoncé 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. \(\mathrm{MP} 3 \mathrm{~s}\) cost $$ 2 each, and notebooks cost \(\$ 3 each. Bruno has income of \)\ 60 . He is considering a consumption bundle containing \(15 \mathrm{MP} 3 \mathrm{~s}\) and 10 notebooks. b. MP3s cost \(\$ 2 each, and notebooks cost $$ 5 each. Bruno has income of \)\$ 110 . He is considering a consumption bundle containing \(20 \mathrm{MP} 3 \mathrm{~s}\) and 10 notebooks. c. MP3s cost \(\$ 3 each, and notebooks cost \)\$ 10 each. Bruno has income of \(\$ 50 . He is considering a consumption bundle containing \)10 \mathrm{MP} 3 \mathrm{~s}$ and 3 notebooks.

Short answer

Bundle A is on the budget line (\(60). Bundle B is within the consumption possibilities but not on the budget line (\)90 of \(110). Bundle C is not within the consumption possibilities (\)60 of $50).

Step-by-step solution

Assessing Bundle A

Begin by calculating the total cost of the bundle containing 15 MP3s and 10 notebooks when MP3s cost \(2 each and notebooks cost \)3 each. The calculation is as follows: Total cost A = (15 MP3s * \(2/MP3) + (10 notebooks * \)3/notebook) = \(30 + \)30 = \(60. Bruno's income is \)60, so this bundle is exactly within his consumption possibilities and lies on the budget line since the total cost equals his income.

Assessing Bundle B

Next, calculate the total cost of the bundle containing 20 MP3s and 10 notebooks when MP3s cost \(2 each and notebooks cost \)5 each. The calculation is: Total cost B = (20 MP3s * \(2/MP3) + (10 notebooks * \)5/notebook) = \(40 + \)50 = \(90. Bruno's income is \)110, so this bundle is within his consumption possibilities but does not lie on the budget line because the total cost is less than his income.

Assessing Bundle C

Finally, calculate the total cost of the bundle containing 10 MP3s and 3 notebooks when MP3s cost \(3 each and notebooks cost \)10 each. The calculation is: Total cost C = (10 MP3s * \(3/MP3) + (3 notebooks * \)10/notebook) = \(30 + \)30 = \(60. Bruno's income is \)50, so this bundle is not within his consumption possibilities because the total cost exceeds his income.

Key concepts

Consumption Possibilities

Consumption possibilities refer to the different combinations of goods and services a consumer can purchase with a given income and prices. Visualizing these possibilities can be done using a budget line, which is a graphical representation that shows all the possible bundles of two goods that a consumer can afford.

For example, in the provided exercise, Bruno has a fixed income and faces specific prices for MP3s and notebooks. Each situation describes a different set of prices and income, leading to different consumption possibilities. When evaluating whether a consumption bundle lies within these possibilities, one must calculate the total cost of the bundle and compare it to Bruno's income.

If the total cost of the bundle is equal to Bruno's income, as in situation (a), it lies on the budget line, meaning it is one of the most expensive bundles Bruno can afford without overspending. This is a crucial concept in economics, as it helps to understand what is feasible for a consumer within their economic constraints.

Bundle Assessment

Bundle assessment is the evaluation of the specific combinations of goods a consumer considers purchasing, in this case, Bruno's combinations of MP3s and notebooks. The assessment involves determining if these combinations are affordable and if they represent an efficient use of the consumer's income.

In the exercise, each bundle Bruno considers is assessed by its total cost. For instance, bundle B, which costs less than Bruno's total income, is within his consumption possibilities but does not exhaust his budget, indicating that he could potentially purchase more of one or both goods. This demonstrates that not every affordable bundle is on the budget line; some lie inside the budget constraint. Bundle C, however, costs more than Bruno's income, making it unaffordable and outside his consumption possibilities.

Effective bundle assessment helps consumers like Bruno maximize satisfaction by choosing the best possible combination of goods within their budget, a key aspect of consumer theory in microeconomics.

Microeconomic Theory

Microeconomic theory is a branch of economics that studies the behavior of individuals and firms in making decisions on the allocation of limited resources. It involves concepts such as demand and supply, elasticity, utility, and consumer choice, among others.

The budget line and consumption possibilities are foundational concepts in microeconomic theory. They illustrate how consumers make choices at the margin, balancing the costs and benefits of different goods given their limited income. Bundle assessment further applies microeconomic principles by examining these choices in detail, looking at the practical applications of the theory.

In our example with Bruno, microeconomic theory helps explain his decision-making process and the trade-offs he faces when choosing how many MP3s and notebooks to buy. By understanding these key microeconomic concepts, students can better grasp how individuals allocate their resources optimally in real-world scenarios.