Question 1: Louis the retired Canadian lives on a fixed budget and consumes only two goods:...

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Question 1: Louis the retired Canadian lives on a fixed budget and consumes only two goods:...

Question 1: Louis the retired Canadian lives on a fixed budget and consumes only two goods: toques (T) and maple syrup (M). Suppose Louis’ monthly budget is 100 and the price of the two goods are (pT, pM) = (4, 2).

(a) Make a properly labeled diagram illustrating Louis’ budget constraint with T on the horizontal axis and M on the vertical axis. Indicate the area corresponding to the set of bundles (M, T) that Louis can afford.

(b) What is the maximum T that Louis can afford? What about the maximum M?

(c) What is the slope of the budget line, and what is the economic interpretation of it?

(d) Suppose the Canadian government decides to ration maple syrup, limiting each person to a maximum of 40 units of maple syrup per month. Draw a new diagram showing Louis’ new budget constraint and indicate the area corresponding to the set of bundles that Louis can afford now.

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Answer 1

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tees (7) x Quand 0, SD 25, D 70 lo MAximum Can be d by Louis mean hal 艹貝 port (A) =(25,0) Budg Unt 90

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