Question: You have an income of $40 to spend on two commodities. Commodity 1 costs $10 per unit, and commodity 2 costs $5 per unit.
a) Write down your budget equation
b) If you spent all your income on commodity 1, how much could you buy?
c) If you spent all of your income on commodity 2, how much could you buy? Use blue ink to draw your budget line in the graph below.
d) Suppose that the price of commodity 1 falls to $5 while everything else stays the same. Write down your new budget equation. On the graph above, use red ink to draw your new budget line.
e) Suppose that the amount you are allowed to spend falls to $30, while the prices of both commodities remain at $5. Write down your budget equation. Use black ink to draw this budget line.
f) On your diagram, use blue ink to shade in the area representing commodity bundles that you can afford with the budget in Part (e) but could not afford to buy with the budget in Part (a). Use black ink or pencil to shade in the area representing commodity bundles that you could afford with the budget in Part (a) but cannot afford with the budget in Part (e).
The above question is taken from 'Workouts in Intermediate Microeconomics - A Modern Approach' by Hal Varian and Theodore C Bergstrom