M01 broo6651 1e sg c01


Ben allocates his lunch budget between two goods, pizza and burritos



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Ch03
sol 03, sol 03, Ch07
12. Ben allocates his lunch budget between two goods, pizza and burritos.
a. Illustrate Ben’s optimal bundle on a graph with pizza on the horizontal axis.
In the diagram below, Ben’s income is I, the price of pizza is P
Z
, and the price of burritos is P
B
Ben’s budget line is linear, and he consumes at the point where his indifference curve is tangent to his budget line at point a in the diagram. This places him on the highest possible indifference curve, which is labeled U
a
. Ben buys Z
a
pizza and B
a
burritos.


44
Pindyck/Rubinfeld, Microeconomics, Eighth Edition Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.
b. Suppose now that pizza is taxed, causing the price to increase by 20%. Illustrate Ben’s new

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