Reference no: EM131112929

Suppose your family's monthly grocery budget is $350. You can use it to by junk food meals for $5/meal or healthy food meals for $7/meal.

1. Draw a budget constraint (BC1) for your family's monthly grocery decision. Label the axes clearly.
2. What is the opportunity cost of a healthy meal?
3. Label the initial consumption point C1 (on the budget constraint) indicating that the family decides to spend half of its budget on healthy food and half on junk food.
4. Suppose the price of healthy food drops to $5/meal. Draw the new budget constraint (BC2) next to the old one.
5. What is the new opportunity cost of health food?
6. Suppose the family responds to this price change by eating more healthy-food meals, increasing to 50 healthy food meals (you will have to adjust consumption of junk food now). Show C2 on the new budget constraint.
7. On a new graph, show the family's demand curve for healthy meals, derived from the change in prices. This graph must be clearly labelled and show how a price change affect the change in quantity demanded.
8. Describe the likely income- and substitute effects for their healthy-eating behavior.
9. Is healthy food a Giffen good here?

Suppose a poor family in China has $10 for food per month. They can purchase rice for calories (to stay alive) or meat for taste. The price of rice is $1/pound and the price of meat is $5/pound.

1. Draw the budget constraint (BC1) for this family.
2. Suppose they typically consume 9 pounds of rice. Show this point on the BC as C1.
3. Suppose a non-profit organization starts giving out rice coupons, cutting the price of rice to $0.75/pound. Show the new budget constraint (BC2) next to the old one.
4. Suppose the family responds by buying 1 pound of meat. Show C2 on the new budget constraint. How much rice do they eat now (show on graph).
5. On a new graph, show the family's demand curve for rice, derived from the change in prices.
6. Describe the likely income- and substitute effects for their rice-eating behavior.
7. Is rice a Giffen good here?