Bill loves maple syrup and makes regular monthly purchases. Each bottle costs $50 (it’s a very special maple syrup). You’ve known Bill for a long time, and have observed, first-handed, the ups and downs of his economic situation.

(a) When he was a graduate student, you knew he managed to get by with a (disposable) income of $1,250 per month, and he bought 25 bottles of maple syrup per month. Draw Bill’s budget set, with maple syrup (in bottles) indicated in the horizontal axis and ‘other stuff’ (measured in dollars) in the vertical axis. Mark Bill’s optimal consumption bundle.

(b) When Bill was appointed a lecturer, his (disposable) income rose to $5,000 per month. The price of maple syrup did not change, and Bill still bought 25 bottles each month. Illustrate his new budget constraint and indicate Bill’s optimal bundle on your graph.

(c) Assume that Bill’s preferences are quasi-linear in maple syrup. Suddenly, Canada has an overabundance of maple syrup and the price drop to $25 per bottle. Can you definitely say that Bill’s consumption of maple syrup will go up or down? Hint: think of decomposing a price change into two effects.

Answer rating: 100% (QA)

Note that in parts a and b the optimality of the consumption bundle implicity follows a revealed pre... View the full answer