Q1. An individual sets aside a certa... [FREE SOLUTION]

Chapter 4: Q1. (page 165)

An individual sets aside a certain amount of his income per month to spend on his two hobbies, collecting wine and collecting books. Given the information below, illustrate both the price-consumption curve associated with changes in the price of wine and the demand curve for wine.
PRICE
WINE

PRICE
BOOK

QUANTITY
WINE

QUANTITY
BOOK

BUDGET
\(10
\)10
7 8 \(150
\)12
\(10
5 9 \)150
\(15
\)10
4 9 \(150
\)29
\(10
2 11 \)150

Short Answer

Expert verified

The following are the price-consumption and demand curves:

Step by step solution

Price consumption curve and demand curve

The price consumption curve is a graphical representation of how consumers' choices between different units of different goods change when the prices of goods change. On the other hand, the demand curve depicts how the demand of the consumer for a particular interest varies due to changes in the price.

Explanation of the graphs.

The graph below depicts the units of books on the y-axis and the units of wine on the x-axis. The curve corresponding to different levels of the units of books and wine is the price consumption curve depicting how a consumer switches his choices with changes in the prices of goods.

As the price of wine increases (the fixed price of books), the budget line moves inside along the x-axis (the intercept on the y-axis is the same). The new tangency point between a new IC (lower than before) and a new budget line decreases the quantity demanded. Thus, the demand curve is as shown below.

The graph below depicts the price of wine along the y-axis and units of wine on the x-axis; the demand curve is the downward sloping curve showing that as the price of wine increases, the units demanded to decrease.

In the graph above, as the prices decrease from 20 to 15 and then to 10 and so on, the quantity demanded increases from 1 to 2 to 3. It depicts that more quantity is demanded at low prices and vice-versa.