HANDOUT FOR CHAPTER 6

The budget line separates the combinations of two goods into

three distinct sets:

combinations outside of (or to the “northeast” of) the

budget line that are unaffordable;

combinations on the budget line that are exactly

affordable (so no income is left over); and

combinations inside of (or “southwest” of) the budget line

that are affordable but that would leave some income
unspent

Question 1 (Budget Set; Opportunity Cost)

Caroline is a 15-year-old girl who goes to a baseball game with
her friend’s family. Her parents bought her a ticket and gave
her $20 to spend on food. Caroline has two favorite items: ice
cream and cheeseburgers. A serving of ice cream has a price of
$5, and a cheeseburger has a price of $10.
a) If Caroline spends all of $20 for ice cream, how many
servings she can buy?

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b) If Caroline spends all of $20 for cheeseburgers, how
many cheeseburgers she can buy?

c) Draw a graph showing Caroline’s budget constraint (BC1)

at the baseball game. What is the opportunity cost of a
cheeseburger? The x-axis denotes quantity of
cheeseburgers and the y-axis denotes quantity of ice
cream.

d) If Caroline buys 1 cheeseburger, how many ice-cream she

can buy with that?

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e) Can Caroline afford to buy 2 ice creams and 2
cheeseburger?

f) How would be the budget constraint (BC2) of Caroline if

her parents gave her$40 instead of $20? Compare BC 1
and BC2.

g) How would be the budget constraint (BC3) of Caroline if

her parents gave her $20 but if the price of icre cream
was $8 instead of 5? Compare BC 1 and BC3. Note: price
of cheeseburger is $10 as before.

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 Question 2 (Marginal Utility, Utility Maximization)
Jackson has a budget of $33 to spend at a sushi restaurant. A
piece of yellowtail tuna has a price of $3 and a piece of sockeye
salmon has a price of $6.
A. Fill in the missing marginal utility and total utility values in
the table below for tuna and salmon.
B. Fill in the marginal utility per dollar (MU/P) for tuna and
salmon for each unit.
C. What is the optimal combination of tuna and salmon for
Jackson to purchase?
Tuna(price = $3) Salmon (price = $6)
Marginal Utility per Total Marginal Marginal Utility
Total Utility Marginal Utility Dollar Spent Utility Utility per Dollar Spent
Quantity TU MU MU/P TU MU MU/P

1 24 60

2 45 108

3 63 150

4 78 186

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5 12

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Question 3
(Equality of Marginal Utility per Dollar in Equilibrium or Utility
Maximization)
Assume Diana spends all of her income on two goods: fish and
chips. At Diana’s current consumption bundle, her marginal
utility of fish is 200, and the price of fish is $10. Her marginal
utility of chips is 50, and the price of chips is $2.
a) Is the current consumption bundle optimal (utility
maximizing) for Diana? How do you know?
Note: Diana will have an optimal consumption bundle if
MUfish/Pricefish=MUchips/Pricechips.

b) Do you have any advice on how Diana should change her

buying behavior? If she follows your advice, what will
happen to her utility of fish and her marginal utility of
chips?
Hint: By purchasing fewer fish, the marginal utility of fish
will increase.

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