Question

Page Exercise 2 Consumer demand with non-lincar budger sets Consumers live on bread r and cheese y. They face the following pricing schedule. If consumption is below. A kaves of bread then each loafcosts $1. Il consanallion 1.1 more then the price falls to S (on every loaf and not just those in excess of A). The price of cheese is $1 per unit, regardless of the amount consumed 1. What is the maximum amount of cheese a consumer with a total budget of M can afford if she buys less than A loaves of bread? And if she buys A or more loaves? 2. Draw the budget constraint for somcone with total budget of $10, labelling all relc vant slopes and intercepts. Is the budget set convex? Justify your answer. 3. Raul has preferences represented by te function u(r,ymin; y) and a total budget of S10. (a) How many loaves would he buy if he paid a constant price of 1 for every loaf of bread, regardless of the total amount of break purchased? (Hint: Draw Raul's indifference map. Then argue that he will optimally choose to consume equal quantities of cheese as bread: = y".) (b) How many loaves would he buy if he paid a constant price of for every loaf of bread, regardless of the total amount of break purchased? (Hint: follow the same line of argument as in the previous question.) (c) Hence determine how many loaves Raul will buy subject to the nonlinear con- straint described in (2) if A = 5 SAMSUNG