Suppose the only two goods that Brett 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 place wine on the vertical axis and cheese on the horizontal axis,then
A)the slope of Brett's budget has not changed.
B)the slope of Brett's budget constraint is flatter at the new prices.
C)the slope of Brett's budget constraint is steeper at the new prices.
D)Brett's budget constraint has shifted in parallel to the budget constraint with the old prices.

Question

Quizplus · Accepted Answer

When the price of wine falls to $5 a bottle and the price of cheese increases to $20 a pound, Brett's budget line will rotate inwards from the vertical axis pivoted at the intercept on the horizontal axis. When this happens, the slope of Brett's budget constraint becomes steeper, meaning that the opportunity cost of cheese has increased while that of wine has decreased. Therefore, Brett will adjust his consumption bundle towards a relatively larger quantity of wine and lower quantity of cheese to maintain his utility level.

Suppose the Only Two Goods That Brett Consumes Are Wine