Jacob receives an allowance of $5 per week. He spends all his allowance on ice cream cones and bottles of smartwater.
a. If the price of ice cream cones is $0.50 per cone and the price of bottles of smartwater is $1 per bottle, draw a graph showing Jacob’s budget constraint. Be sure to indicate on the graph the maximum number of ice cream cones and the maximum number of bottles of smartwater that Jacob can buy.
b. Jacob buys 8 ice cream cones and 1 bottle of smartwater. Draw an indifference curve representing Jacob’s choice, assuming that he has chosen the optimal combination.
c. Suppose that the price of ice cream cones rises to $1 per cone. Draw Jacob’s new budget constraint and his new optimal consumption of ice cream cones and bottles of smartwater.