Consider the utility function U= ln(M)+ ln(S) where Mis the level of medical care, and Sis spending on all other goods. Suppose medical care is priced at $200-per-unit of medical care, income is $20,000, and let P_S= $1.

2. Write the budget constraint.
4. Sketch the budget constraint where M is on the horizontal axis.
6. Let MU_M= 1/Mand MU_S= 1/S. Use the rational spending rule to find the optimal level of medical care and generalized spending.
8. Suppose price of medical care decreases by $100-per-unit of medical care, sketch the new budget constraint on the same graph as Exercise 2.2.
10. Suppose the government established a new policy for all individuals making less than $30,000. The new policy will pay for the first $2,000 of medical care for these individuals each year.

How does this affect the person's budget constraint and optimal market basket?

Answer rating: 100% (QA)

a The budget constraint can be written as 200M S 20000 b Sketching the budget constraint S 20000 200... View the full answer