Suppose the government implements rationing to control prices. Use Amanda's original budget line from A for this analysis. Now, in addition to eash, consumers need to provide ration coupons to purchase goods. Suppose the government allocates 50 ration coupons to Amanda. In addition to $10 in cash, it now costs 5 ration coupons to buy Marijuana. For tobacco it now costs $5 in cash and 5 ration coupons. (Hint: draw a second constraint based on the ration coupon price on top of your original cash price budget constraint). Whit does rationing do to the consumer's budget set?

6. Budget Line: Amanda spends all of her income on tobacco and marijuana cigarettes. (A)

Marijuana cigarette costs $10 per pack and tobacco cigarettes costs $5 per pack. When Amanda's income is $100 per week, she buys 10 packs of tobacco and 5 packs of marijuana. (B) When her income rises to $120, she buys 10 packs of tobacco and 7 packs of marijuana.

a. Plot her budget line for A & B.

Using her Budget Line from B, now suppose the price of tobacco cigarettes falls to 53, but her income is still $120. She now purchases 13.33 packs of tobacco and B packs of marijuana. Decompose this change into an income and substitution effect.

(You don't need to have exact consumption bundles but graphically show the direction of the changes).

Answer rating: 100% (QA)

Answer Plotting Amandas Budget Line For Amandas original budget line A she has an income of 100 and is able to purchase 10 packs of tobacco and 5 packs of marijuana To plot this budget line we can beg... View the full answer