Question

   A widget-rationing program requires that anyone who buys widgets first pay a lump sum for a license; i.e. the consumer cannot buy widgets without a license. The license allows the consumer to buy any number of widgets at the controlled price. The proceeds from the sale of the licenses are used to reduce income taxes for widget buyers and non-buyers alike.

With widgets on the x-axis and income on the y-axis, draw the budget constraint before and after the imposition of the license for a consumer who does not buy a license.

Answer 1

Consider the given problem here “X=the amount of widget purchased” and “Y=level of income”. The following fig shows the budget line of an individual before the widget-rationing program.

So, here A1B1 is the actual budget line and E1 be the equilibrium where the utility of an individual is maximum. Now, under the program an individual have to pay a lump sum amount to get the license and then any amount of widget can be purchased. Here the new budget line is A1A2B2, where “A1” represent the level of income if the individual don’t buy any widget. If the individual buy any amount have to pay am amount but the price of widget will be same, => the slope of the budget line will also be same. So, the new budget line is A1A2B2. Here we can see that the equilibrium is A1 given the preference of the consumer, => the consumer will buy any amount of widget.