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Question: Suppose I go on a week-long vacation and, when I arrive at the airport on the island, I must choose between either renting a car or taking a taxi to our hotel. Renting a car involves a fixed fee of $400 for the week, with each mile driven afterward just costing $0.40, which is the price of gasoline per mile. Taking a taxi involves no fixed fees, but each mile driven on the island during the week now costs $1 per mile.
Suppose I brought $2,000 on my trip to spend on "miles driven on the island" and "other goods." Note that the price of "other goods" is normalized to $1.
a. On a graph with miles driven on the horizontal and other consumption on the vertical axis, illustrate my budget constraint assuming I chose to rent a car. What is the relative price of each mile driven?
b. On the same graph from part (a), illustrate my budget constraint assuming I chose to take taxis. What is the relative price of each mile driven?
c. Explain when I should rent a car.
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