Question

Dave is initially endowed with 20 apples and 20 oranges = (20, 20)a) Assume p1 = p2 = 2. Write down Dave's budget constraint, and plot budget constraint in the graph. Mark all bundles on budget line for which Dave is selling apples and is buying oranges

Answer 1

Dave's budget constraint can be represented by the equation 20P1 + 20P2 = B, where P1 and P2 are the prices of apples and oranges respectively, and B is Dave's budget. The graph of the budget constraint has a vertical intercept of (0,40) and a horizontal intercept of (20,0). Points along the budget line with quantities of apples less than or equal to 20 and quantities of oranges greater than or equal to 20 represent bundles where Dave is selling apples and buying oranges.

Step-by-step explanation:

Dave's budget constraint can be represented by the equation:

20P1 + 20P2 = B,

where P1 and P2 are the prices of apples and oranges respectively, and B is Dave's budget. Since we're assuming that P1 = P2 = 2, the equation simplifies to:

40 = B.

To plot the budget constraint, we can use a graph with the quantity of apples on the x-axis and the quantity of oranges on the y-axis. Since B = 40, the graph will have a vertical intercept of (0,40) and a horizontal intercept of (20,0). All points along the budget line with quantities of apples less than or equal to 20 and quantities of oranges greater than or equal to 20 represent bundles where Dave is selling apples and buying oranges.