Assume that you are on an island where there are only two commodities—coconuts and pineapples—and you can spend your income only on these two foods. If the price of coconuts is Pc and the price of pineapples is Pp and your income is I, draw a budget constraint, carefully labelling the points on the two axes and where the attainable and unattainable portions of consumption are. Note: you can choose any Pc and Pp that you like—they do not have to be equal. What is the slope of this budget constraint? What is the economic interpretation of the slope? Now, let’s bring a little more structure to this diagram. Let I=£200, Pc=£1 per coconut and Pp=£2 per pineapple. Draw a new diagram using these numbers. Consider these questions: How many coconuts can you buy if you do not buy any pineapples? How many pineapples can you buy if you do not buy any coconuts? What is the slope and what economic information does it give us? Show the point of 100 coconuts and 100 pineapples on your diagram. Can you buy this? Would you want to? (Remember the assumptions about consumer behaviour).
Assume that you are on an island where there are only two commodities—coconuts and pineapples—and you can spend your income only on these two foods. If the price of coconuts is Pc and the price of pineapples is Pp and your income is I, draw a budget constraint, carefully labelling the points on the two axes and where the attainable and unattainable portions of consumption are.
Note: you can choose any Pc and Pp that you like—they do not have to be equal. What is the slope of this budget constraint? What is the economic interpretation of the slope?
Now, let’s bring a little more structure to this diagram. Let I=£200, Pc=£1 per coconut and Pp=£2 per pineapple. Draw a new diagram using these numbers. Consider these questions:
- How many coconuts can you buy if you do not buy any pineapples?
- How many pineapples can you buy if you do not buy any coconuts?
- What is the slope and what economic information does it give us?
- Show the point of 100 coconuts and 100 pineapples on your diagram. Can you buy this? Would you want to? (Remember the assumptions about
consumer behaviour ). - Show the point of 100 coconuts and 25 pineapples on your diagram. Can you buy this? Would you want to? (Remember the assumptions about consumer behaviour).
In carrying out this activity, please make sure to draw the diagram(s) with care. For example, please ensure that you label the axes appropriately, and explain your reasoning fully and in detail.
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