Draw an example set of utility functions for someone

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Reference no: EM132130617

Question - You are in your first semester at college and deciding to spend your income between textbooks and food. You have $360 for the month. Textbooks are priced at $20 and food is priced at $10.

Your parents decide that they will assist you if you have to spend more than $150 total on textbooks by giving you $0.50 per dollar you spend on textbooks.

1. Draw the budget constraint for this rule.

a. We say that the budget constraint has a "kink". At what point does this kink occur?

b. What is the slope on either side of the kink in the budget constraint?

c. Draw an example set of utility functions for someone who would experience a substitution effect towards textbooks as a result of this rule.

2. Try and draw a budget constraint where both of these policies are active.

Reference no: EM132130617

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