An individual consumer has an income of $100 to spend on twogoods, which are food...

An individual consumer has an income of $100 to spend on two goods, which are food and clothes. When each of these two goods has a price of $2 per unit, the individual spends equal amounts on food and clothes.

(a) For the above set of income and prices, illustrate the consumer's equilibrium diagrammatically, showing the budget line and indifference curves.

(b) If the government then provides the individual with a subsidy of $1 for every unit of food purchased, how many units of each good will be bought, assuming that the price elasticity of demand for food is unity?

(c) If the government next abolishes this food subsidy, but simultaneously gives the consumer $50 to spend freely on the two goods in any way desired, what happens to the individual's welfare [compared to part (b) above]?

Expert Solution

Rahul Sunny answered 2 years ago

you have $100 to spend on food and clothing. the price of food is $4, and...

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