Question

1. A consumer buys only two goods x and y, with income, I =$40. Price of y = $2.

In the following problems you are asked to draw the budget lines for the consumer under different situations using Excel. Note the equation of the budget line is given by P_xx+P_yy=I

In order to draw the budget line, first create a column of values of x. Then using the equation of the budget line, create a column of corresponding values of y. (You need to create a formula to get the values of y using prices of x and y, the amount of x that you used in the previous column and the value of income. Copy that formula as needed to create the column of y.) Finally, using Excel’s chart option draw a line diagram for the budget line with x in the horizontal axis and y in the vertical axis.

(a) Initial Budget Line.

P_x=$4 Plot x =0,1,2,3…..10. Draw the budget line, BL₁.

(b) Price Discount for Bulk Purchase.

P_x=$4 After the consumer buys 5 units of x, he/she can buy every additional unit of x at a price of $2. Consider x=0,1,2,3…..15. Draw the new budget line, BL₂.

(c) BOGO—Buy One Get One Free.

P_x=$4 If the consumer buys one unit of x, he/she gets one unit of x free. But there is a limit. The consumer can have only one unit of x free of cost. Consider x =0,1,2,3….11. Draw the new budget line BL₃.

(d) Cash Subsidy or Voucher.

(i) Cash Subsidy P_x=$4 . Suppose x is food and y is gasoline. In order to help the consumer the government gives the consumer a cash subsidy of $20 that he/she can use towards purchase of x and/or y. So the consumer’s effective income is $60. Consider x=0,1,2,3….15. Plot the new budget line BL₄. In the same diagram copy BL₁ from part (a). Label each budget line.

(ii) Voucher (Food Stamps).P_x=$4 Suppose that instead of a cash subsidy that can be used for both food and gasoline, the government gives the consumer $20 worth of food stamps that the consumer can use only towards the purchase of food. Consider, x =0,1,2,3….15. Draw the new budget line, BL₅ in the same diagram as in d (i) that includes both BL₁ and BL₄. Label all budget lines.

(Hint: It may be useful to add a column that includes the dollar amount of voucher used, which ranges between 0 to 20.)

Answer 1