Reference no: EM132131223

Question - This question is to get some practice drawing budget constraints. 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.

1. Draw the budget constraint. Put textbooks on the x-axis label your x and y intercepts. What is the slope of the budget constraint?

Your parents decide that they want to help you out, particularly with food. They decide that they will provide you with $100 extra a month, as long as your overall expenditures on food total at least $100.

2. Draw the budget constraint with this new rule.

a. Draw an example set of utility functions for an individual for whom this would have simply an income effect.

b. Now draw an example set of utility functions for someone who, if the extra $100 was unconditional would spend <$100 on food, but, with the condition spends $100 on food.

Instead of that first rule, 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.

3. 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.

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