Francois has a weekly budget of 30 to spend on Chai Lattes a

Francois has a weekly budget of $30 to spend on Chai Lattes and Philly Cheesesteaks. A Chai Latte costs $3 while a Philly Cheesesteak costs $9.

What happens to Francois’ opportunity set if the price of Chai Latte’s, the price of Philly Cheesesteaks, and Francois’ budget were all cut in half?

Solution

Let Chai Latte be denoted by CL and Philly Cheesesteak be denoted by PC

Then the equation to the budget line is given by,

3CL + 9PC = 30

(CL / 10) + (PC / 3.33) = 1. The area within the budget line refers to the opportunity set of Francois.

Now, when prices of both the goods and money budget is cut in half, the budget line will be,

1.5CL + 4.5PC = 15.

(CL / 10) + (PC / 3.33) = 1.

Thus it can be seen that when the prices and budget are cut in half there is no change in the budget line compared to the situation when the prices and budget set were full and thus there will be no change to Francois opportunity set.