Question

Suppose there are only two types of goods to consume: food and leisure. An average Californian citizen has a daily income of $100. The price of one meal of food is $$20 and the price ((or value)) of one unit of leisure is $$10. An average citizen in Mississippi has a daily income of $50. The price of one unit of food is $10 and the price ((or value)) of one unit of leisure is $10. Who is more well-off in terms of the bundles of goods they can consume?

Answer 1

Californians are more well off, than Mississippians in terms of the bundles of goods they can consume

Step-by-step explanation:

Budget Line denotes the product combinations that consumer can afford buying, with given prices & money income. (al income spent)

Budget Line Equation : p1x1 + p2x2 = y , where

p1 & p2 are prices of two goods, x1 & x2 are quantities of two goods, y is money income

• Californian citizen budget line : 20M + 10L = 100

where M = meal, L= leisure, 20 & 10 are price of M & L, Y = 100

Max meal affordable by Californian = Y / P(M) = 100 / 20 = 5

Max leisure affordable by Californian = Y / P(L) = 100 / 10 = 10

• Mississippian citizen budget line : 10M + 10L = 50

where M = meal, L= leisure, 10 & 10 are price of M & L, Y = 50

Max meal affordable by Mississippian = Y / P(M) = 50 / 10 = 5

Max meal affordable by Mississippian = Y / P(M) = 50 / 10 = 5

Californian budget set (consumption bundles affordable) is area under the budget line : joining (5,0) & (0,10). Mississippian budget set is area under the budget line : joining (5,0) & (0,5).

Californian budget set is bigger than Mississippian budget set, evident from above explanation. So, Californians are more well off in terms of the bundles of goods they can consume