Reference no: EM13159492
Budget Sets and Full Price Elasticity
Question 1: (a) Suppose that Martha's income is $40,000 per year. She can spend it on health care visits, which cost $80 per visit, or on groceries (standing for all other goods), which cost $100 per bag of groceries. Draw Martha's budget constraint. Using indifference curves, show Martha's optimum if she buys 300 bags of groceries per year.
(b) Suppose that Martha's income rises to $42, 000 per year, and that she increases her consumption of health care visits by five visits. Using the graphs for exercise 1, draw the new equilibrium. What is her income elasticity of demand for health care visits?
Q.2 Draw an isoquant graph showing :
(a) Suppose that John Smith gets promoted to a job that causes two changes to occur simultaneously: (i) John earns a higher wage, and (ii) a safer environment causes his health to depreciate less rapidly. How would these two changes together affect John's desired health capital?
(b) Suppose that John could work 365 days per year and could earn $200 per day for each day he worked. Draw his budget line with respect to his labor-leisure choice.
(c) Suppose that John chooses to work 200 days per year. Draw the appropriate indifference curve, and note his equilibrium wage income and labor-leisure choices.
(d) Suppose, as in exercise (c), that John's wage rises from $200 to $210 per day. Show how his equilibrium level of income and labor-leisure will change.
(e) Suppose that John is ill 10 days per year. Draw the impact of this illness on the equilibrium defined in exercise 5. How will it change his equilibrium allocation of earnings and labor-leisure?
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