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Unformatted text preview: ANSWER to part (f)/Question 2/Discussion 1 (A) With the lumpsum subsidy, Melissa has $70 more dollars to spend on both goods. So, her budget lines shifts up (parallel shift; the intercepts change). The slope remains the same as of the initial budget line (=2/7). (B) With the coupon for turkey burgers (B), Melissa can use the extra $70 only on turkey burgers. Hence, she can buy as many as 110 burgers if she only spends her income on burgers; because she can now spend $770 on burgers. However, the maximum she can spend on tuna fish remains $700 and the maximum she can buy if she spends all her income on tuna fish is 350 tins. So, up to the first 10 turkey burgers that she can get with the coupon ($70/PB), she can only buy as many as 350 tins. If she wants to buy more turkey burgers, she should use her income. After B=10, the budget line has the same slope as of the initial budget line (=2/7). (C) Now, Melissa has the option to buy a $70 coupon (for B) for $20. So, if she wants to buy as many as 10 turkey burgers, she can buy them at the price of $2; because she only spends $20 for the first 10 turkey burgers she buys. She does not have this option for tuna fish. So, up to the first 10 turkey burgers that she can buy, the slope of the budget line is 1. This is because the first 10 turkey burgers cost her $2/each and tuna fish also cost &2/tin (hence, slope=PF/PB). After the first 10 turkey burgers, any extra burger costs $7. So, after B=10 the slope remains the same as of the initial budget line (=2/7). The intercept is lower than case (B), since she uses $20 to buy the $70 coupon. B 110 110(20/7) 100 (C) (B) 10 (A) Initial Budget Line 350 385 F ...
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This note was uploaded on 08/08/2008 for the course ECON 301 taught by Professor Hansen during the Spring '08 term at Wisconsin.
- Spring '08