Every consumer has a red-money income and a blue-money income and each commodity has a red price and a blue price.You can buy a good by paying for it either with blue money at the blue price or with red money at the red price.Harold has 7 units of red money to spend and 32 units of blue money to spend.The red price of ambrosia is 1 and the blue price of ambrosia is 4.The red price of bubble gum is 1 and the blue price of bubble gum is 2.If ambrosia is on the horizontal axis, and bubble gum on the vertical axis, then Harold's budget set is bounded by

A) two line segments, one running from (0, 23) to (7, 16) and another running from (7, 16) to (15, 0) .
B) two line segments one running from (0, 23) to (8, 7) and the other running from (8, 7) to (15, 0) .
C) two line segments, one running from (0, 24) to (7, 16) and the other running from (7, 16) to (14, 0) .
D) a vertical line segment and a horizontal line segment, intersecting at (7, 16) .
E) a vertical line segment and a horizontal line segment, intersecting at (8, 7) .

Question

Bryce Alcorn · Accepted Answer

Final Answer : A, Explanation :  Harold can spend all his red money on ambrosia, getting 7 units (since the red price is 1), or all his blue money on ambrosia, getting 8 units (32 blue money / 4 blue price). For bubble gum, he can get 32 units with blue money (32 blue money / 1 blue price) or 7 units with red money (7 red money / 1 red price). The correct endpoints for the budget set are found by considering the maximum of each good he can buy with each type of money, leading to the line segments described in option A.

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