Any good Southern breakfast includes grits (which my wife loves) and bacon (which I love). Suppose we allocate $60 per week to consumption of grits and bacon, that grits cost $2 per box and bacon costs $3 per package.
A:
Use a graph with boxes of grits on the horizontal axis and packages of bacon on the vertical to answer the following:
(a) Illustrate my family’s weekly budget constraint and choice set.
(b) Identify the opportunity cost of bacon and grits and relate these to concepts on your graph.
(c) How would your graph change if a sudden appearance of a rare hog disease caused the price of bacon to rise to $6 per package, and how does this change the opportunity cost of bacon and grits?
(d) What happens in your graph if (instead of the change in (c)) the loss of my job caused us to decrease our weekly budget for Southern breakfasts from $60 to $30? How does this change the opportunity cost of bacon and grits?
B:
(a) Write down the mathematical formulation of the budget line and choice set and identify elements in the budget equation that correspond to key features of your graph from part 2.1A(a).
(b) How can you identify the opportunity cost of bacon and grits in your equation of a budget line, and how does this relate to your answer in 2.1A(b).
(c) Illustrate how the budget line equation changes under the scenario of 2.1A(c) and identify the change in opportunity costs.
(d) Repeat (c) for the scenario in 2.1A (d).