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

you have $100 to spend on food and clothing. the price of food is $4, and the price of clothing is $10.

A. graph your budget constraint

B. suppose the government subsidizes clothing such that each unit of clothing is half price, up yo the first five units of clothing. Graph your budget constraint in this circumstance.

Solutions

Expert Solution

A) Given:

Income: $100,

Price of Food (X) = $4,

Price of Clothing (Y) =$10

Thus, the budget constaint is:

B) Now, the new price of clothing upto 5 units is $5. Thus, the set of equations of budget constraint is

I have constructed the below diagram for greater clarity

Let me explain this:

The dotted black line indicates the budget constraint if the subsidized price of clothing continued even after the first 5 units. Thus, we need only the green part of this line, lying below the blue line.

Now, The red line indicates the inital budget line.

We can clearly see that after 5 units, there arises a kink for the budget line to be continuous. Hence, the final budget line is highlighted in green.

In case of any query, feel free to comment

Rahul Sunny answered 2 years ago

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