Redraw two budget lines-substitution and income effects

Assignment Help Business Economics

Reference no: EM131001265

Hillary spends all her income on milk and cookies. Graph Hillary's budget line when income = $20, Pcookies= $1 & Pmilk= $2. Pick some point in the middle as her optimal choice and draw in the appropriate indifference curve. (PUT MILK on the Y-axis)

a. The government decides to subsidize Hillary's consumption of cookies by giving her a subsidy of $.50 for every cookie she buys (that is, she now pays 50 cents for each cookie). Graph the change including her new optimal choices of cookies and milk and show the substitution and incomeeffects for MILK.

b. Redraw the two budget lines, but without substitution and income effects.

c. Given her decision, how much does the government spend? Show this graphically also.

d. The government decides to change its policy. Instead of spending the dollar amount you reported in (c)as a subsidy, it will give her that amount as cash to spend as she chooses. (That is, it is not tied to her purchase of cookies. This is called a "cash equivalent.") Draw her new budget line. Is she better or worse off with the cash equivalent?

Reference no: EM131001265

Questions Cloud

Complete insurance coverage : There is a 1 percent chance that you will have healthcare bills of $100,000, a 19 percent chance that you will have healthcare bills of $10,000, a 60 percent chance that you will have healthcare bills of $500, and a 20 percent chance that you will ha..

What was dollar increase in costs above inflation rate cost : An article in the Chicago Tribune stated that in 2007, college costs rose faster than inflation and student aid. A report by the College Board found that average in-state tuition and fees at four-year public universities rose 6.6% to $6,185. What wou..

Air pollution control specialists : Air pollution control specialists in southern California monitor the amount of ozone, carbon dioxide, and nitrogen dioxide in the air on an hourly basis. The hourly time series data exhibit seasonality, with the levels of pollutants showing patterns ..

Represent her preferences with the utility function : Latanya likes to talk on the telephone. We can represent her preferences with the utility function U(B, J) = 18B + 20J, where B and J are minutes of conversation per month with Bill and Jackie, respectively. If Latanya plans to use the phone for one ..

Redraw two budget lines-substitution and income effects : Hillary spends all her income on milk and cookies. Graph Hillary's budget line when income = $20, Pcookies= $1 & Pmilk= $2. Pick some point in the middle as her optimal choice and draw in the appropriate indifference curve. Redraw the two budget line..

Discuss the ethical considerations in this line of research : Discuss the advantages and limitations of replication in the tobacco industry's use of research. Discuss the ethical considerations in this line of research

Evaluates consumption streams : Consider a two-period economy with a single commodity (say leisure): x_1 is the consumption of leisure in period 1, and x_2 is the consumption of leisure in period 2. When Peter evaluates consumption streams, he cares only about the best time in his ..

Regarding quality or duration of goods future performance : Mei issues purchase order to June for goods which costs $ 25,000. June agrees to provide the same but she doesn't sign the purchase order. Mei can file a suit for the breach of contract. A description that gives rise to an express warranty under whic..

Reduce the remaining four interest payments : First Lincoln Bank agreed to settle the debt in exchange for land having a fair value of $16 million but carried on Rothschild Chair Company's books at $13 million.

User Account

All Pages