On the planet Mungo, they have two kinds of money, blue money and red money. Every commodity has two prices—a red-money price and a blue-money price. Every Mungoan has two incomes—a red income and a blue income. In order to buy an object, a Mungoan has to pay that object’s red-money price in red money and its blue-money price in blue money. (The shops simply have two cash registers, and you have to pay at both registers to buy an object.) It is forbidden to trade one kind of money for the other,
and this prohibition is strictly enforced by Mungo’s ruthless and efficient monetary police.

• There are just two consumer goods on Mungo, ambrosia and bubble gum. All Mungoans prefer more of each good to less.

• The blue prices are 1 bcu (bcu stands for blue currency unit) per unit of ambrosia and 1 bcu per unit of bubble gum. • The red prices are 2 rcus (red currency units) per unit of ambrosia and 6 rcus per unit of bubble gum.

(a) On the graph below, draw the red budget (with red ink) and the blue budget (with blue ink) for a Mungoan named Harold whose blue income is 10 and whose red income is 30. Shade in the “budget set” containing all of the commodity bundles that Harold can afford, given its* two budget constraints. Remember, Harold has to have enough blue money and enough red money to pay both the blue-money cost and the red-money cost of a bundle of goods.

(b) Another Mungoan, Gladys, faces the same prices that Harold faces and has the same red income as Harold, but Gladys has a blue income of 20. Explain how it is that Gladys will not spend its entire blue income no matter what its tastes may be. Draw Gladys’s budget lines.

(c) A group of radical economic reformers on Mungo believe that the currency rules are unfair. “Why should everyone have to pay two prices for everything?”