Question

Bob consumes two goods, gasoline and sandwiches. He has an income of $100 and faces

a price of gasoline of $2 per gallon and a price of sandwiches of $5.

(a) Graph and write the equation for Bob’s budget line.

(b) Bob consumes 4 sandwiches. If Bob’s consumption bundle is just affordable, how

much gas is he consuming?

(c) If Bob consumes the bundle in (b) and the price of sandwiches rises to $8, then by

how much will Bob’s income have to increase so that he can still just afford the bundle

he currently consumes?

(d) Suppose that Bob must spend both money and (ration) coupons to purchase gasoline and

sandwiches. He has 40 coupons and the coupon price of gasoline is 2 and the coupon

price of sandwiches is 1. Show Bob’s budget set. Show Bob’s budget set if his income

were to rise to 250 and if his income were to fall to 30.

Answer 1