Draw the budget constraint for someone

Reference no: EM132198009

Question: Consumer demand with non-linear budger setsConsumers live on breadxand cheesey. They face the following pricing schedule. Ifconsumption is belowAloaves of bread then each loaf costs $1. If consumption isAormore then the price falls to $12(on every loaf and not just those in excess ofA). The priceof cheese is $1 per unit, regardless of the amount consumed.

1. What is the maximum amount of cheese a consumer with a total budget of Mcanafford if she buys less thanAloaves of bread? And if she buysAor more loaves?

2. Draw the budget constraint for someone with total budget of $10, labelling all rele-vant slopes and intercepts. Is the budget set convex? Justify your answer.

3. Raul has preferences represented by the functionuR(x, y) = min[x;y] and a totalbudget of $10.

(a) How many loaves would he buy if he paid a constant price of 1 for every loaf of bread, regardless of the total amount of break purchased? (Hint: Draw Raul's indifference map. Then argue that he will optimally choose to consume equal quantities of cheese as bread: x^âˆ- = y^âˆ-.)

(b) How many loaves would he buy if he paid a constant price of 1/2 for every loaf of bread, regardless of the total amount of break purchased? (Hint: follow the same line of argument as in the previous question.)

4. Now consider Gabriela with the same budget as Raul, but preferences uG(x, y) = min[2x;y]. How does her demand differ from Raul's when facing the nonlinear constraint described in (2.) if A= 5? Give an intuition for this result.

Reference no: EM132198009

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