Is tom better or worse off after the changes

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Reference no: EM13187346

Tom is a utility maximizer with an income of $200/week, which he spends on two goods, food and clothing. The unit prices of food and clothing are $3 and $20 respectively.

1.) Draw a graph that shows Tom's choice using an indifference curve and his budget line, assuming he spends 60% of his income on food. Explain your diagram briefly.

2.) A new tax increases the price of food by $4 (clothing remains unchanged). But Tom now also qualifies for a food subsidy of $40 per week. Now Tom chooses to buy 35 units of food and 5 units of clothing. Illustrate his new equiibrium on the diagram.

Is Tom better or worse off after these changes?

Reference no: EM13187346

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