SOLUTIONS MANUAL Microeconomics An Intuitive Approach 2E
CHAPTER 01: Introduction (Solutions Not Available)
CHAPTER 02: Choice Sets and Budget Constraints
Exercise 2.1
Any good Southern breakfast includes grits (which my wife loves) and bacon
(which I love). Suppose we allocate $60 per week to consumption of grits and
bacon, that grits cost $2 per box and bacon costs $3 per package.
A: Use a graph with boxes of grits on the horizontal axis and packages of
bacon on the vertical to answer the following:
(a) Illustrate my family’s weekly budget constraint and choice set.
Answer: The graph is drawn in panel (a) of Exercise Graph 2.1.
Exercise Graph 2.1 : (a) Answer to (a); (b) Answer to (c); (c) Answer to (d)
(b) Identify the opportunity cost of bacon and grits and relate these to
concepts on your graph.
Answer: The opportunity cost of grits is equal to 2/3 of a package of bacon
(which is equal to the negative slope of the budget since grits appear on the
,horizontal axis). The opportunity cost of a package of bacon is 3/2 of a box of
grits (which is equal to the inverse of the negative slope of the budget since
bacon appears on the vertical axis).
(c) How would your graph change if a sudden appearance of a rare hog disease
caused the price of bacon to rise to $6 per package, and how does this change
the opportunity cost of bacon and grits?
Answer: This change is illustrated in panel (b) of Exercise Graph 2.1. This
changes the opportunity cost of grits to 1/3 of a package of bacon, and it
changes the opportunity cost of bacon to 3 boxes of grits. This makes sense:
Bacon is now 3 times as expensive as grits — so you have to give up 3 boxes of
grits for one package of bacon, or 1/3 of a package of bacon for 1 box of grits.
(d)What happens in your graph if (instead of the change in (c)) the loss of my
job caused us to decrease our weekly budget for Southern breakfasts from $60
to $30? How does this change the opportunity cost of bacon and grits?
Answer: The change is illustrated in panel (c) of Exercise Graph 2.1. Since
relative prices have not changed, opportunity costs have not changed. This is
reflected in the fact that the slope stays unchanged.
, Answer: The change is illustrated in panel (c) of Exercise Graph 2.1. Since
relative prices have not changed, opportunity costs have not changed.
This is reflected in the fact that the slope stays unchanged.
B: In the following, compare a mathematical approach to the graphical ap-
proach used in part A, using x1 to represent boxes of grits and x2 to represent
packages of bacon:
(a) Write down the mathematical formulation of the budget line and choice
set and identify elements in the budget equation that correspond to key
features of your graph from part 2.1A(a).
Answer: The budget equation is p 1 x1 + p 2 x2 = I can also be written as
I p1
x2 = − x1 . (2.1.i)
p2 p2
With I = 60, p 1 = 2 and p 2 = 3, this becomes x2 = 20 − (2/3)x1 — an equa-
tion with intercept of 20 and slope of −2/3 as drawn in Exercise Graph
2.1(a).
(b) How can you identify the opportunity cost of bacon and grits in your equa-
tion of a budget line, and how does this relate to your answer in 2.1A(b).
Answer: The opportunity cost of x1 (grits) is simply the negative of the
slope term (in terms of units of x2 ). The opportunity cost of x2 (bacon) is
the inverse of that.
(c) Illustrate how the budget line equation changes under the scenario of 2.1A(c)
and identify the change in opportunity costs.
Answer: Substituting the new price p 2 = 6 into equation (2.1.i), we get
x2 = 10 − (1/3)x1 — an equation with intercept of 10 and slope of −1/3 as
depicted in panel (b) of Exercise Graph 2.1.
(d) Repeat (c) for the scenario in 2.1A(d).
Answer: Substituting the new income I = 30 into equation (2.1.i) (hold-
ing prices at p 1 = 2 and p 2 = 3, we get x2 = 10 − (2/3)x1 — an equation
with intercept of 10 and slope of −2/3 as depicted in panel (c) of Exercise
Graph 2.1.
, Exercise 2.2
Suppose the only two goods in the world are peanut butter and jelly.
A: You have no exogenous income but you do own 6 jars of peanut butter and 2
jars of jelly. The price of peanut butter is $4 per jar, and the price of jelly is $6 per
jar.
(a) On a graph with jars of peanut butter on the horizontal and jars of jelly on
the vertical axis, illustrate your budget constraint.
Answer: This is depicted in panel (a) of Exercise Graph 2.2. The point E
is the endowment point of 2 jars of jelly and 6 jars of peanut butter (PB).
If you sold your 2 jars of jelly (at a price of $6 per jar), you could make
$12, and with that you could buy an additional 3 jars of PB (at the price
of $4 per jar). Thus, the most PB you could have is 9, the intercept on the
horizontal axis. Similarly, you could sell your 6 jars of PB for $24, and with
that you could buy 4 additional jars of jelly to get you to a maximum total
of 6 jars of jelly — the intercept on the vertical axis. The resulting budget
line has slope −2/3, which makes sense since the price of PB ($4) divided
by the price of jelly ($6) is in fact 2/3.
Exercise Graph 2.2 : (a) Answer to (a); (b) Answer to (b)
(b) How does your constraint change when the price of peanut butter increases
to $6? How does this change your opportunity cost of jelly?
Answer: The change is illustrated in panel (b) of Exercise Graph 2.2. Since
you can always still consume your endowment E , the new budget must
contain E . But the opportunity costs have now changed, with the ratio of
the two prices now equal to 1. Thus, the new budget constraint has slope
−1 and runs through E . The opportunity cost of jelly has now fallen from
3/2 to 1. This should make sense: Before, PB was cheaper than jelly and
so, for every jar of jelly you had to give up more than a jar of peanut butter.
CHAPTER 01: Introduction (Solutions Not Available)
CHAPTER 02: Choice Sets and Budget Constraints
Exercise 2.1
Any good Southern breakfast includes grits (which my wife loves) and bacon
(which I love). Suppose we allocate $60 per week to consumption of grits and
bacon, that grits cost $2 per box and bacon costs $3 per package.
A: Use a graph with boxes of grits on the horizontal axis and packages of
bacon on the vertical to answer the following:
(a) Illustrate my family’s weekly budget constraint and choice set.
Answer: The graph is drawn in panel (a) of Exercise Graph 2.1.
Exercise Graph 2.1 : (a) Answer to (a); (b) Answer to (c); (c) Answer to (d)
(b) Identify the opportunity cost of bacon and grits and relate these to
concepts on your graph.
Answer: The opportunity cost of grits is equal to 2/3 of a package of bacon
(which is equal to the negative slope of the budget since grits appear on the
,horizontal axis). The opportunity cost of a package of bacon is 3/2 of a box of
grits (which is equal to the inverse of the negative slope of the budget since
bacon appears on the vertical axis).
(c) How would your graph change if a sudden appearance of a rare hog disease
caused the price of bacon to rise to $6 per package, and how does this change
the opportunity cost of bacon and grits?
Answer: This change is illustrated in panel (b) of Exercise Graph 2.1. This
changes the opportunity cost of grits to 1/3 of a package of bacon, and it
changes the opportunity cost of bacon to 3 boxes of grits. This makes sense:
Bacon is now 3 times as expensive as grits — so you have to give up 3 boxes of
grits for one package of bacon, or 1/3 of a package of bacon for 1 box of grits.
(d)What happens in your graph if (instead of the change in (c)) the loss of my
job caused us to decrease our weekly budget for Southern breakfasts from $60
to $30? How does this change the opportunity cost of bacon and grits?
Answer: The change is illustrated in panel (c) of Exercise Graph 2.1. Since
relative prices have not changed, opportunity costs have not changed. This is
reflected in the fact that the slope stays unchanged.
, Answer: The change is illustrated in panel (c) of Exercise Graph 2.1. Since
relative prices have not changed, opportunity costs have not changed.
This is reflected in the fact that the slope stays unchanged.
B: In the following, compare a mathematical approach to the graphical ap-
proach used in part A, using x1 to represent boxes of grits and x2 to represent
packages of bacon:
(a) Write down the mathematical formulation of the budget line and choice
set and identify elements in the budget equation that correspond to key
features of your graph from part 2.1A(a).
Answer: The budget equation is p 1 x1 + p 2 x2 = I can also be written as
I p1
x2 = − x1 . (2.1.i)
p2 p2
With I = 60, p 1 = 2 and p 2 = 3, this becomes x2 = 20 − (2/3)x1 — an equa-
tion with intercept of 20 and slope of −2/3 as drawn in Exercise Graph
2.1(a).
(b) How can you identify the opportunity cost of bacon and grits in your equa-
tion of a budget line, and how does this relate to your answer in 2.1A(b).
Answer: The opportunity cost of x1 (grits) is simply the negative of the
slope term (in terms of units of x2 ). The opportunity cost of x2 (bacon) is
the inverse of that.
(c) Illustrate how the budget line equation changes under the scenario of 2.1A(c)
and identify the change in opportunity costs.
Answer: Substituting the new price p 2 = 6 into equation (2.1.i), we get
x2 = 10 − (1/3)x1 — an equation with intercept of 10 and slope of −1/3 as
depicted in panel (b) of Exercise Graph 2.1.
(d) Repeat (c) for the scenario in 2.1A(d).
Answer: Substituting the new income I = 30 into equation (2.1.i) (hold-
ing prices at p 1 = 2 and p 2 = 3, we get x2 = 10 − (2/3)x1 — an equation
with intercept of 10 and slope of −2/3 as depicted in panel (c) of Exercise
Graph 2.1.
, Exercise 2.2
Suppose the only two goods in the world are peanut butter and jelly.
A: You have no exogenous income but you do own 6 jars of peanut butter and 2
jars of jelly. The price of peanut butter is $4 per jar, and the price of jelly is $6 per
jar.
(a) On a graph with jars of peanut butter on the horizontal and jars of jelly on
the vertical axis, illustrate your budget constraint.
Answer: This is depicted in panel (a) of Exercise Graph 2.2. The point E
is the endowment point of 2 jars of jelly and 6 jars of peanut butter (PB).
If you sold your 2 jars of jelly (at a price of $6 per jar), you could make
$12, and with that you could buy an additional 3 jars of PB (at the price
of $4 per jar). Thus, the most PB you could have is 9, the intercept on the
horizontal axis. Similarly, you could sell your 6 jars of PB for $24, and with
that you could buy 4 additional jars of jelly to get you to a maximum total
of 6 jars of jelly — the intercept on the vertical axis. The resulting budget
line has slope −2/3, which makes sense since the price of PB ($4) divided
by the price of jelly ($6) is in fact 2/3.
Exercise Graph 2.2 : (a) Answer to (a); (b) Answer to (b)
(b) How does your constraint change when the price of peanut butter increases
to $6? How does this change your opportunity cost of jelly?
Answer: The change is illustrated in panel (b) of Exercise Graph 2.2. Since
you can always still consume your endowment E , the new budget must
contain E . But the opportunity costs have now changed, with the ratio of
the two prices now equal to 1. Thus, the new budget constraint has slope
−1 and runs through E . The opportunity cost of jelly has now fallen from
3/2 to 1. This should make sense: Before, PB was cheaper than jelly and
so, for every jar of jelly you had to give up more than a jar of peanut butter.
