Question

Andrea allocates her $30 weekly lunch budget between 2 goods, pizza and burritos. Each pizza costs $5 and burritos cost $3.

a. Illustrate Andrea’s optimal bundle on a graph with pizza on the horizontal axis and where she consumes 3 pizzas a week and spends the rest of her budget on burritos.

b. Suppose that pizza is taxed causing the price to increase by 20%. Show Andrea's new optimal bundle on your graph in part a, where she now only consumes 2 pizzas a week, since pizza is more expensive

c. Suppose instead that pizza prices remain at $5 but there is a new regulation and no one is allowed more than 2 pizzas per week. Show her new optimal bundle on your graph in part a, and compare this outcome to Andrea's position with the pizza tax in part b

Answer #1

A) SEE THE DIAGRAM BELOW (BC= 5X+3Y=30)

B) SEE THE DIAGRAM BELOW, now, as we know the price of pizza has increased so the BC Shifts to BC2 as less pizza can be consumed along with the shift in IC.

C) SEE THE DIAGRAM BELOW, now as we can see the price is initial as in part a but the new regulation has limited the consumption so, there will be only a shift of IC curve along with the same budget constraint. the difference between part b and c is that there is a shift of BC in part b and a shift of only IC in part c. but the optimal bundle remains the same, however.

PLEASE GIVE A THUMBS UP:)

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