Antonio's Book Budget Dilemma: Exploring the Impact of Price Changes
The Effect of Book Price Changes on Antonio's Budget
Antonio buys five new college textbooks during his first year at school at a cost of $80 each. Used books cost only $50 each. When the bookstore announces a 10 percent increase in the price of new books and a 5 percent increase in the price of used books, Antonio's father offers him $40 extra.
Question:
What happens to Antonio's budget line after the price changes? Illustrate the change with new books on the vertical axis. Is Antonio worse or better off after the price change? Explain.
Answer:
a. Antonio's budget line shifts inward and rotates counterclockwise. The new budget line will be steeper, indicating that the price of new books has increased more than the price of used books, causing the opportunity cost of purchasing new books to rise.
b. Antonio is worse off after the price change. With the price of new books increasing by 10 percent, he will need to spend more money to buy the same five new books. Additionally, the price of used books also increased, although by a smaller percentage (5 percent), which means he will also have to spend more on used books. Since his father offers him only an extra $40, this increase in book prices exceeds the additional funds provided, leaving Antonio with less purchasing power for books than before the price change. Consequently, his ability to afford both new and used books has diminished, making him worse off in terms of book affordability.