Graph Description
The graph shows a budget line for a consumer with a $100 weekly budget, pizza priced at $8, and coffee priced at $4. The maximum affordable pizza (spending all income on pizza) is 12.5 units; the maximum coffee is 25.0 units. The slope of the budget line is −2.0, equal to the price ratio Px/Py. Cobb-Douglas indifference curves are shown, representing combinations yielding equal utility.
| Parameter | Value | Meaning |
|---|---|---|
| Weekly Budget | $100 | Total income available to spend |
| Price of Pizza | $8.00 | Cost per unit of pizza |
| Price of Coffee | $4.00 | Cost per unit of coffee |
| Budget Line Slope | −2.0 | Opportunity cost: units of coffee given up per pizza |
| Max Pizza (all income) | 12.5 units | Income ÷ Price of Pizza |
| Max Coffee (all income) | 25.0 units | Income ÷ Price of Coffee |
Budget Constraint
Shows all combinations affordable with given income and prices. The intercepts are Income/Px and Income/Py.
Indifference Curves
Combinations yielding equal utility. Downward sloping (trade-offs exist) and convex (diminishing MRS).
Marginal Rate of Substitution (MRS)
How much coffee you willingly give up for one more pizza while staying equally happy. Equals the slope of the indifference curve.
Optimization Condition
The optimal bundle is found where the slope of the indifference curve equals the slope of the budget line.
Cobb-Douglas Preferences
Consumer spends fixed shares of income: α on pizza, (1−α) on coffee — regardless of prices.