03 Jun Question 1. Budget constraints a. Selma Bouvier consumes two goods: martinis
Question
1. Budget constraints
a. Selma Bouvier consumes two goods: martinis, which cost $5, and packs of cigarettes, which
cost $10. Working at the Springfield DMV, she earns an income of $30. Putting martinis
(M) on the y-axis and cigarettes (C) on the x-axis, graph Selmas budget constraint. Indicate
the two intercepts of the budget constraint and the slope.
M
C
b. Suppose the Springfield DMV gives Selma a raise, bringing her income to $40. Draw the
new budget constraint on the graph above, and once again indicate the two intercepts of the
budget constraint and the slope.
2
2. Budget constraints
a. Prof. Nesson consumes two goods: healthcare (H) and everything else (E). He has $80 a
week to spend on these two things. Healthcare costs $10 per unit and everything else costs
$10 per unit
i. Write down Prof Nessons budget equation:
ii. If Prof. Nesson spends all his income on either healthcare or everything else, how
much of each could he buy?
iii. Draw Prof. Nessons budget constraint. Put healthcare on the y-axis and everything
else on the x-axis
iv. What is the slope of the budget constraint?
H
E
3
b. Now suppose the price of healthcare rises to $20 per unit while everything else is constant.
i. Write down Prof. Nessons new budget equation.
ii. Draw Prof. Nessons new budget constraint on the graph above (make sure to
distinguish it from the budget constraint in (a).
c. Continuing with the prices in (a), Prof. Nesson develops a serious medical condition and will
die if he does not consume at least one unit of healthcare. Indicate Prof. Nessons budget
constraint and shade in the budget set (collection of all feasible consumption bundles)
H
E
4
3. Budget Constraint: Odd Prices
Prof. Nesson consumes two commodities, recycled aluminum cans and Rush albums. He consumes
aluminum cans because people pay him $5 to store each pound, and Rush albums cost him $10 each.
He has no other income aside from the cans.
a. If Prof. Nesson stores no cans, how many Rush albums can he purchase?
b. If Prof. Nesson stores ten pounds of cans how many Rush albums can he purchase?
c. Write Prof. Nessons budget equation:
d. Sadly, Prof. Nesson moves to a small house and can only 8 lbs of cans. On the graph below,
draw Prof. Nessons budget constraint and shade in his budget set (all the affordable bundles)
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