Question

Individual 1 purchases clothing X and other goods Y. The individual earns £48. Clothing costs £4. Other goods cost £2.

To help the homeless, everyone can get clothing 32 vouchers which they can only use to purhcase clothing.

Draw the normal budget constraint and the one with the voucher.

Please make your drawings very clear and simple to understand

Answer 1

Ans. When there is no voucher for clothing,

Individual 1 can buy maximum of 12 units of clothing (48/4) and 24 units of other goods (48/2). This budget line will be represented by BL

When 32 vouchers are given for clothing, the maximum amount of other goods are still 24 units but clothings maximum amount increases by 32 units to 44 units. Also, till atmost 32 units of clothing is consumed, consumer can spend all his income on other goods and but 24 units of them but as consumption of clothing exceeds 32 units, consumer needs to reduce the consumption of other goods. This makes the budget line in this case kinked at point V and is represented by BVL’.

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