Quiz 3. Budget Ans

Quiz 3. Budget Ans - x , he can only buy up to 10 unitsthis...

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Shomu Banerjee ECON 201 BUDGET QUIZ ANSWER Milton wishes to spend all his weekly income of $10 on two goods x and y . Assume both goods are divisible. The price of each good is $1 per unit. Last Sunday he cut a coupon from the newspaper. It said ‘Buy one unit of y and get one free!’ Draw Milton’s budget constraint. x y 0 5 10 5 10 A B C D If Milton were to spend all his income on y , he can only buy up to 11 units with the coupon—this gives us point A on the graph. If he were to spend all his income on
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Unformatted text preview: x , he can only buy up to 10 unitsthis gives us point D on the graph. Starting from D, if he wishes to purchase a fraction of unit of y , he has to give up the same fraction of x since each is priced at $1. This gives the line segment CD. At C, he is purchasing a full unit of y, which means he can now get a unit of y for free, causing his budget to jump from C to B. Along AB, Milton uses the coupon for y ; along CD, he cannot use the coupon....
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.

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Quiz 3. Budget Ans - x , he can only buy up to 10 unitsthis...

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