Suppose the only two goods that Lorenzo consumes are wine and cheese. When wine sells for $10 a bottle and cheese sell for $10 a pound, he buys 6 bottles of wine and 4 pounds of cheese - spending his entire income of $100. One day the price of wine falls to $5 a bottle, and the price of cheese increases to $20 a pound, while his income does not change. If you illustrate wine on the vertical axis and cheese on the horizontal axis, then
A)the slope of Lorenzo's budget has not changed.
B)the slope of Lorenzo's budget constraint is flatter at the new prices.
C)the slope of Lorenzo's budget constraint is steeper at the new prices.
D)Lorenzo's budget constraint has shifted in a parallel fashion to the budget constraint with the old prices.

Question

Quizplus · Accepted Answer

Lorenzo's original budget constraint can be found by multiplying the price of wine by the number of bottles of wine purchased and the price of cheese by the number of pounds of cheese purchased. 
At the original prices: 
$10 x 6 + $10 x 4 = $100

After the price change: 
$5 x ( ) + $20 x ( ) = $100

Using the same equation, we can solve for the new quantities of wine and cheese that Lorenzo can afford:

$5 x 12 + $20 x 2 = $100

Lorenzo can now buy 12 bottles of wine and 2 pounds of cheese.

The new budget constraint connects these two consumption bundles, which means we need to plot the points (6,4) and (12,2) on the graph. The new budget constraint is steeper, which means that the slope has increased. Therefore, the correct answer is C.

Suppose the Only Two Goods That Lorenzo Consumes Are Wine