Question

Suppose that a consumer has $200 to spend per month. Assume that the price of a unit of a household product is $5. For each of the following scenarios, draw the consumerís budget constraint by plotting all else on the y-axis and household products on the x-axis.

(a) For every $100 she spends on household products she gets $10 back which she can spend on anything.

(b) Suppose that once the consumer purchases 10 household products, each additional household product is 50% cheaper.

Answer 1

Income = 200 Price of household poduct (Pm) = 5 All other goods = y. let, price index of all other goods be pq.. Then, the budget constraint ahi general is given as - 5th & Py. Y = 200. Scanned with CamScanner cs

© If consumer Efends $200 or household produde chy then he can buy 200 = 40 h. She gets $20 in room with which she can buy a addition h and other things the budget constraint is given belowo. ya 44 after 6 Now, h=10, Ph=205 So, consumer stends $50 on to 10 h. After that he can still buy 150 = 60 h. The budget constraint de given below. After point of the consdocent becomes florier as en olecrechtes 4 h Cs Scanned With 70 CamScanner