Tutorial 6 week 7 short answer solution

Tutorial 7: Short Answer Solution

Marc has a budget of $20 a month to spend on DVDs and ginger beer. The price of a DVD is $10
and the price of ginger beer is $5 a bottle.
What is the relative price of ginger beer in terms of DVDs and what is the opportunity cost of a
bottle of ginger beer?
The relative price of ginger beer is 1/2 DVD. The relative price of ginger beer is the price
of ginger beer divided by the price of a DVD. The price of ginger beer is $5 a bottle and
the price of a DVD is $10, so the relative price of ginger beer is $5 a bottle divided by
$10 a DVD, which equals 1/2 DVD per bottle. The opportunity cost of a bottle of ginger
beer is 1/2 DVD. The opportunity cost of a bottle of ginger beer is the quantity of DVDs
that must be forgone to obtain a bottle of ginger beer. The price of ginger beer is $5 a
bottle and the price of a DVD is $10, so to buy one bottle of ginger beer Marc must forgo
1/2 DVD.
Calculate Marc’s real income in terms of ginger beer. Calculate his real income in terms of DVDs.
Marc’s real income is 4 bottles of ginger beer. Marc’s real income in terms of bottles of
ginger beer is equal to his money income divided by the price of a bottle of ginger beer.
Marc’s money income is $20, and the price of ginger beer is $5 a bottle. Marc’s real
income is $20 divided by $5 a bottle of ginger beer, which is 4 bottles of ginger beer.
Marc’s real income is 2 DVDs. Marc’s real income in terms of DVDs is equal to his
money income divided by the price of a DVD, which is $20 divided by $10 a DVD or 2
DVDs.
Calculate the equation for Marc’s budget line (with the quantity of ginger beer on the left side).
The equation that describes Marc’s budget line is QR = 4 – 2QDVD. Call the price of a
bottle of ginger beer PR and the quantity of ginger beer QR, the price of a DVD PDVD and
the quantity of DVDs QDVD, and income y. Marc’s budget equation is PRQR + PDVDQDVD
= y. If we substitute $5 for the price of a bottle of ginger beer, $10 for the price of a DVD,
and $20 for income, the budget equation becomes $5QR + $10QDVD = $20. Next, divide
both sides by $5 to obtain QR + 2QDVD = 4. Finally subtract 2QDVD from both sides to
give QR = 4 – 2QDVD.
Draw a graph of Marc’s budget line with the quantity of DVDs on the x-axis. What is the slope of
Marc’s budget line? What determines its value?
The budget line is illustrated in Figure 12.10. The slope of the budget line, when DVDs
are plotted on the x-axis is 2. The magnitude of the slope is equal to the relative price
of a DVD. The slope of the budget line is “rise over run”. If the quantity of DVDs
decreases from 2 to 0, the quantity of ginger beer increases from 0 to 4 bottles. The rise
is 4 and the run is 2. So the slope equals 4/2, which is 2.