Question

b) A high-school student has a monthly budget of $80 to spend on music and burritos. Burritos cost $8 each, while songs are free after paying the Spotify monthly fee of $9.99.

1. In a diagram, measuring songs along the horizontal axis, draw the high-school student’s budget constraint.

c) A family has an yearly income of $50,000 to spend on the kids’ education or on all other goods.

1. In a diagram measuring dollars spent on education along the horizontal axis and dollars spent on all other goods along the vertical axis, draw the family’s budget constraint.

2. In your diagram, draw the family’s budget constraint if the family must pay a 10% income tax but receives a $5,000 school voucher.

Answer 1

b).

Consider the given problem here there are 2 goods, “B=burrito” and “S=Songs”. The income of the person is given by, “M=80” and the price of “B” is “8”, => if we spend totally on “B” the person will get “80/8=10 units” of “B”, this point is given the fig. as “A”. Now there don’t any fixed price for “S”, here the person have to pay a “fixed cost” of amount “9.99”. So, here the budget constraint of the consumer is horizontal given in the fig below.

So, in the above fig. “ACD” be the budget line of the consumer here.

c).

Consider a typical family having income “50,000” and there are 2 goods, “kid’s education” and “other goods”.

So, here the budget line is down ward sloping given in the above fig. So AB be the budget line here.

2).

Now, assume that the family have to pay a income tax of amount, “10%*50,000 = 5,000”, on the other hand the family will receive a “school voucher” of the amount “5,000”. So, the net income of the consumer is given by, “50,000 – 5,000 + 5,000 = 50,000”. So, we can see that the net income is remain same as before, => the budget line will remain as before it will not change.