Question

Jim buys only milk and cookies.
a. In year 1, Jim earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Jim's budget constraint.

Answer 1

a. Figure 12 shows Jim's budget constraint. The vertical intercept is 50 quarts of milk,
since if Jim spent all his money on milk he would buy $100/$2 = 50 quarts of it.
The horizontal intercept is 25 dozen cookies, since if Jim spent all his money on
cookies he would buy $100/$4 = 25 dozen cookies.
b. If Jim's salary rises by 10 percent to $110 and the prices of milk and cookies rise by
10 percent to $2.20 and $4.40, Jim's budget constraint would be unchanged. Note
that $110/$2.20 = 50 and $110/$4.40 = 25, so the intercepts of the new budget
constraint would be the same as the old budget constraint. Since the budget
constraint is unchanged, Jim's optimal consumption is unchanged.

Answer 2

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