Sam and Amanda moved from Hawaii to Iowa. Their grocery budget has remained at $100 per month, but the price of their groceries has dramatically gone down due to cost of living! They used to pay $10 for a dozen organic eggs (let Q1 represent the number of dozens of eggs) but now they pay $5. For frozen pizza (Q2) they paid $15 but now they are paying $10. What is Sam and Amanda's new budget constraint?

Question

Lillianna Holder

Business

19 October, 05:54

Sam and Amanda moved from Hawaii to Iowa. Their grocery budget has remained at $100 per month, but the price of their groceries has dramatically gone down due to cost of living! They used to pay $10 for a dozen organic eggs (let Q1 represent the number of dozens of eggs) but now they pay $5. For frozen pizza (Q2) they paid $15 but now they are paying $10. What is Sam and Amanda's new budget constraint?

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Ean Walter · Answer 1

A budget constraint is the amount of goods and service that a person or firm can purchase given their income.

In this case, the budget constraint of Sam and Amanda is determined by their income: that is to say, their monthly grocery budget, which is $100 per month.

Because a dozen organic egg costs $5, and a frozen pizza costs $10, if we suppose that Sam Amanda will spend half their income on each item, their budget constraint will allow them to buy the following amounts:

$50 / $5 = 10 dozen organic eggs

$50 / $10 = 5 frozen pizzas.