Microeconomics I (Bachelor’s Degree in Economics)
University of Barcelona
- 1 -
Budget Constraint
1. Each month, Nuria, who is a fashion freak, spends €56 on fashion magazines (good 1) and
accessories (good 2). The price of fashion magazines is €4, while any accessory (bracelets,
rings, earrings, etc.) costs €7. Suppose that all the goods are perfectly divisible. Draw Nuria’s
initial budget set. For each of the changes described below, draw the new budget set (always
starting from the initial situation) and show on graph the consumption bundles for which the
following holds: a bundle A that was affordable initially and is still affordable after the change;
a bundle B that was affordable initially, but is not affordable after the change; a bundle C that
was not affordable before the change, but is affordable after the change; and a bundle D that
was not affordable initially nor is affordable after the change. Does Nuria’s budget set
increase or decrease after the change?
a) Nuria’s income decreases by €16 and the price of the accessories goes down to €5.
b) Nuria is only allowed to buy a maximum of 10 fashion magazines per month.
c) The government charges a tax of €1 for each magazine that Nuria buys.
d) The government charges a 25% income tax and subsidises the price of the
magazines by €0.50.
e) The government gives Nuria a coupon for a free magazine (Nuria can decide
whether to use it or not, but she cannot sell it).
f) Suppose now that the magazines are on offer. If Nuria buys 5 or more magazines
per month, she will enjoy a discount of €0.50 for each magazine beyond the fifth
one.
g) Nuria can buy a loyalty card for €14 at the newsstand next to her house (where
she usually buys the magazines). This card entitles her to 50% off the price of
magazines. Nuria can buy all the magazines she wants at the discounted rate.
2. Marc has an income of €100 to spend on two commodities, comics (good 1) and all other
goods (good 2). Comics cost €1, and the price of all other goods is equal to €2. Consider all
commodities perfectly divisible.
a) Write down Marc’s budget equation and draw the budget line. Show Marc’s
budget set.
b) Calculate the slope of the budget line and explain its meaning.
Suppose now that Marc finds a wallet with €50 on the train, that is, his income increases by
€50.
c) Draw Marc’s new budget line. Has the slope of the budget line varied?
Suppose that Marc decides not to keep the wallet and the €50 he just found on the train and
hands it in at the Lost & Found office. Thus, Marc’s income remains €100. If the price of
comics increases by €1:
