Your income is $100 a week. The grocery store where you shop sells eggs for $10 apiece and wine for $20 a bottle.
Your income is $100 a week. The grocery store where you shop sells eggs for
$10 apiece and wine for $20 a bottle. But, starting in June, your Aunt Agnes
offers to pay for half your egg purchases, so eggs only cost you $5 a week.
With Aunt Agnes’s offer in place, you buy 12 eggs and 2 bottles of wine each
week.
- Draw a diagram that illustrates your budget lines in May and June.
- In June, how much is Aunt Agnes spending on you per week? (Your answer should be a number of dollars.)
In July, Aunt Agnes stops subsidizing your egg purchases and instead gives you a weekly cash gift equal to the amount you calculated in question 2 .
- Add your July budget line to the picture.
- True or False: You are exactly as happy in July as in June. Use your diagram to justify your answer.
B. The Pullman Company has a lot of pull in the town of Pullman, Illinois. Everybody in town is identical, and they all work for the company, which pays them each $10 a day. Their favorite food is apples, which they get from a mail order catalogue for $1 apiece.
- Draw the typical resident’s budget line between “apples” and “all other goods” (measured in dollars). Draw in the optimum point.
6. Pullman plans to lower the wage rate to $8 a day. Draw the new budget line.
Pullman has discovered that if residents are less happy than they were at $10 a day, they will all leave town. To prevent this, Pullman has offered to subsidize everyone’s apple purchases: From now on, if you are a Pullmanite who buys an apple, you will pay only a fraction of the cost and the company will pay the rest. Pullman plans to choose a fraction which is just large enough to keep people from leaving town.
- Draw the new budget line. Indicate the new budget point. Label the corresponding quantity of apples A.
- d) Use your graph to illustrate the amount that Pullman spends on the apple subsidy. (Hint: How much of your $8 income do you have left over after buying A apples? How much of your $8 income would you have left over if you bought A apples at the unsubsidized price of $1 apiece? Where is the difference coming from?
- True or False: Pullman could end up spending just as much on the apple subsidy as it saves by lowering wages.
Your income is $100 a week. The grocery store where you shop sells eggs for $10 apiece andwine for $20 a bottle. But, starting in June, your Aunt Agnes offers to pay for half your eggpurchases,…
