Question

Liam has $100 and spends his income on scratchers tickets (priced at $1 per ticket) and guitar strings (priced at $4) per set.

A. Graph Liam’s budget constraint, putting guitar strings on the horizontal axis and scratchers tickets on the vertical axis. Using an indifference curve, show Liam’s optimal consumption bundle if Liam buys 60 scratchers tickets.

B. Suppose Liam’s income increases to by $20 (his income increases to $120). Adding a new budget constraint and indifference curve to your original graph, show Liam’s new optimal consumption bundle, assuming guitar strings are normal goods and scratchers tickets are inferior goods.

C. Draw the Engel curve for scratchers tickets

Answer 1

Sol

Given income = $100, price of guitar string = $4 and price of scratcher ticket = $1

A

60 scratcher ticket bought , so 10 guitar strings can be bought from remaining money.

AB is the budget line and e₁ the equilibrium point.

B

CD is budget line after income increased by 20%, and e₂ is new equilibrium point.

C

Since scrather ticket is inferior it's consumption declines after increase in income and Engel curve is negatively sloped.