Emma consumes only apples and milk. She does not have any income, but she inherited an apple tree and a single cow from her grandfather. The apple tree produces 100 apples each year and the cow gives 160 gallons of milk. Suppose that Emma can freely buy and sell apples and milk in the market at a price of $1 per apple and $2 for a gallon of milk. That is, she can sell some of her apples for additional milk, or she can sell some of her milk for additional apples. Draw her budget constraint, with milk on the horizontal axis, and apples on the vertical, carefully labeling the intercepts and slope. (Hint: she begins at her initial bundle and can trade from there. Determine her trading ratio of apples for milk.)

Emma consumes only apples and milk. She does not have any income, but she inherited an apple tree and a single cow from her grandfather. The apple tree produces 100 apples each year and the cow gives 160 gallons of milk. Suppose that Emma can freely buy and sell apples and milk in the market at a price of $1 per apple and $2 for a gallon of milk. That is, she can sell some of her apples for additional milk, or she can sell some of her milk for additional apples. Draw her budget constraint, with milk on the horizontal axis, and apples on the vertical, carefully labeling the intercepts and slope. (Hint: she begins at her initial bundle and can trade from there. Determine her trading ratio of apples for milk.)

 

 

Answer:

Solution : Money income She has id she sell all of her endowment.

M= Px *X + Py *Y

M =2*160 + 1 *100=420

M=420.

X-intercept = 420/2 =210.

Y-intercept =420/1 =420.

Price ratio =Px/Py = 2/1

Asked on February 15, 2018 in economics.
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