12 BUDGET CONSTRAINT (Ch. 2)
(a) Write down a budget equation stating those combinations of the three
commodities, Good X, hours of speeches by politicians (P), and hours of
speeches by university administrators (A) that Emmett could afford to
(b) On the graph above, draw a two-dimensional diagram showing the
locus of consumptions of the two kinds of speeches that would be possible
2.9 (0) Jonathan Livingstone Yuppie is a prosperous lawyer. He
has, in his own words, “outgrown those confining two-commodity lim-
its.” Jonathan consumes three goods, unblended Scotch whiskey, de-
signer tennis shoes, and meals in French gourmet restaurants. The price
of Jonathan’s brand of whiskey is $20 per bottle, the price of designer
tennis shoes is $80 per pair, and the price of gourmet restaurant meals
is $50 per meal. After he has paid his taxes and alimony, Jonathan has
$400 a week to spend.
(a) Write down a budget equation for Jonathan, where Wstands for
the number of bottles of whiskey, Tstands for the number of pairs of
tennis shoes, and Mfor the number of gourmet restaurant meals that he
(b) Draw a three-dimensional diagram to show his budget set. Label the
M
TW
8
5
20
(c) Suppose that he determines that he will buy one pair of designer tennis
2.10 (0) Martha is preparing for exams in economics and sociology. She
has time to read 40 pages of economics and 30 pages of sociology. In the
same amount of time she could also read 30 pages of economics and 60
pages of sociology.
NAME 13
(a) Assuming that the number of pages per hour that she can read of
either subject does not depend on how she allocates her time, how many
pages of sociology could she read if she decided to spend all of her time
(b) How many pages of economics could she read if she decided to spend
2.11 (1) Harry Hype has $5,000 to spend on advertising a new kind of
dehydrated sushi. Market research shows that the people most likely to
buy this new product are recent recipients of M.B.A. degrees and lawyers
who own hot tubs. Harry is considering advertising in two publications,
a boring business magazine and a trendy consumer publication for people
who wish they lived in California.
Fact 2: Each ad in the business magazine will be read by 1,000 recent
Fact 3: Each ad in the consumer publication will be read by 300 recent
(a) If Harry spends his entire advertising budget on the business pub-
(b) If he spends his entire advertising budget on the consumer publication,
(c) Suppose he spent half of his advertising budget on each publication.
(d) Draw a “budget line” showing the combinations of number of readings
by recent M.B.A.’s and by lawyers with hot tubs that he can obtain if he
spends his entire advertising budget. Does this line extend all the way
14 BUDGET CONSTRAINT (Ch. 2)
(e) Let Mstand for the number of instances of an ad being read by an
M.B.A. and Lstand for the number of instances of an ad being read by
a lawyer. This budget line is a line segment that lies on the line with
by a lawyer with a hot tub? 2.
8
12
MBA’s x 1000
16
c
a
b
10
Budget line
6
In order to buy an object, a Mungoan has to pay that object’s red-
money price in red money and its blue-money price in blue money. (The
shops simply have two cash registers, and you have to pay at both registers
to buy an object.) It is forbidden to trade one kind of money for the other,
and this prohibition is strictly enforced by Mungo’s ruthless and efficient
monetary police.
•There are just two consumer goods on Mungo, ambrosia and bubble
•The blue prices are 1 bcu (bcu stands for blue currency unit) per
•The red prices are 2 rcus fired currency units) per unit of ambrosia
(a) On the graph below, draw the red budget (with red ink) and the
blue budget (with blue ink) for a Mungoan named Harold whose blue
income is 10 and whose red income is 30. Shade in the “budget set”
containing all of the commodity bundles that Harold can afford, given
NAME 15
0 5 10 15 20
5
10
15
Ambrosia
Gum
20
Blue Lines
Red Line
20. Explain how it is that Gladys will not spend its entire blue income
no matter what its tastes may be. (Hint: Draw Gladys’s budget lines.)
The blue budget line lies strictly outside
(c) A group of radical economic reformers on Mungo believe that the
currency rules are unfair. “Why should everyone have to pay two prices
for everything?” they ask. They propose the following scheme. Mungo
will continue to have two currencies, every good will have a blue price and
a red price, and every Mungoan will have a blue income and a red income.
Suppose that Harold has the same income after this reform, and that
prices do not change. Before declaring which kind of purchaser it will be,
∗We refer to all Mungoans by the gender-neutral pronoun, “it.” Al-
though Mungo has two sexes, neither of them is remotely like either of
ours.
16 BUDGET CONSTRAINT (Ch. 2)
Harold contemplates the set of commodity bundles that it could afford
by making one declaration or the other. Let us call a commodity bundle
0 5 10 15 20
5
10
15
Ambrosia
Gum
20
Blue Line
Red Line
2.13 (0) Are Mungoan budgets really so fanciful? Can you think of sit-
uations on earth where people must simultaneously satisfy more than one
budget constraint? Is money the only scarce resource that people use up
when consuming? Consumption of many commodities
takes time as well as money. People have