Simplest Pricing Scheme Allows
You need to allocate a monetary budget of w euros between gigabytes of data per month of data transfer on a smartphone (x-axis) and all other consumption (on y-axis).
The simplest pricing scheme allows you to buy any number x of GB per month at a fixed price of p euros per GB (prices and GB are in monthly terms).
How many GB can you buy if you use your entire budget on GB? Of course, you may choose not to buy any GB at all and in this case, you can use your budget on other consumption.
Equation of the budget line is: w = px·x + py·y
- w: available budget
- px and x: price and quantity of good x
- py and y: price and quantity of good y
To draw the budget line, start from the intercepts of the x and y axes (we read amount of good x on the x-axis and amount of good y on the y-axis):
- How much of good x can I get if I spend all my budget w on it: = ∙ + ∙0 ⇔ = /
- How much of good y can I get if I spend all my budget w on it: = ∙0+ ∙ ⇔ = /
Your task is to draw the set of feasible choices of (x, y), i.e. combinations of x GB of data transfer and y euros of other consumption such that you do not exceed your total budget for the case where w = 10 and p = 2. The maximum number of GBs that can be bought is 5. If bought 0 GB, the budget of 10€ can be spent on other goods.
The line joining the two points shows all the combinations of good x and good y (bundles) that you can afford. All the points above and on the right of the line are unaffordable bundles. All the points below the line are affordable but will leave some of the budget not spent, which is not desirable.
On which point does the budget line cross the x-axis and y-axis (the extremes of the budget line)? Write the answer in the answer box as (0,y);(x,0).