Question

11. A family has to decide how much of their monthly income they will spend on good A and how much they will spend on good B. Assume that the price of good A is $20, the price of good B is $4, and the monthly income of the family is $600. On a piece of paper, plot the budget constraint faced by this family putting the quantity of good A on the horizontal axis and the quantity of good B on the vertical axis. Now answer this question: What is the value of the vertical intercept?

12. Given the information in question 11, what is the value of the horizontal intercept of the budget constraint?

13. Given the information in question 11, what is the value of the slope of the budget constraint?

14. A family has to decide how much of their monthly income they will spend on milk and how much they will spend on bread. Suppose this household has a fixed income of $1,000 per month, the price of milk is $2 per litre and the price of bread is $1 per kg. First, on a piece of paper, plot the monthly budget constraint faced by this family with "litres of milk" on the horizontal axis and "kg of bread" on the vertical axis. Now, assume that the government introduces a cash subsidy program that gives this family $500 in cash per month. Which of the following best describes what happens to the budget constraint of the family?

a. The budget constraint rotates outward around the horizontal intercept

b. The budget constraint rotates outward around the vertical intercept

c. The budget constraint rotates inward around the horizontal intercept

d. The budget constraint shifts outward and its slope remains unchanged

e. The budget constraint rotates inward around the vertical intercept

f. The budget constraint shifts inward and its slope remains unchanged

15. Given the information in question 14, what is the value of the vertical intercept of the budget constraint after the introduction of the subsidy?

16. Given the information in question 14, what is the value of the horizontal intercept of the budget constraint after the introduction of the subsidy?

17. Consider again the initial scenario described in question 14: A family has to decide how much of their monthly income they will spend on milk and how much they will spend on bread. This family has a fixed income of $1,000 per month, the price of milk is $2 per litre and the price of bread is $1per kg. However, now consider a different subsidy scheme. In particular, suppose that the government decides to reimburse the family for half of their milk expenses, i.e. the government decides to give $1 to the family (to be spent on whatever they want) for every litre of milk purchased. Which of the following best describes what happens to the budget constraint of the family with the introduction of this subsidy scheme?

a. The budget constraint rotates outward around the horizontal intercept

b. The budget constraint rotates inward around the horizontal intercept

c. The budget constraint rotates outward around the vertical intercept

d. The budget constraint rotates inward around the vertical intercept

e. The budget constraint shifts outward and its slope remains unchanged

f. The budget constraint shifts inward and its slope remains unchanged

18. Given the information in question 17, what is the value of the vertical intercept of the budget constraint after the introduction of the reimbursement scheme?

19. Given the information in question 17, what is the value of the horizontal intercept of the budget constraint after the introduction of the reimbursement scheme?

20. Given the information in question 17, what is the new opportunity cost of milk (in terms of bread) after the introduction of the reimbursement scheme? (NOTE: enter a positive number).

Answer 1