Question

On
** ONE** diagram and using budget
constraints and indifference curves, illustrate the following:

** (a)**
Lavenda spends $400 on widgets every semester. Widgets sell for $20
each.

** (b)**
A tax on widgets increases its price by 50%. Lavenda complains
about the price increase but keeps on buying the same quantity as
before.

** (c)**
To stop her endless complaints her friend Balkaran offers her $200.
Is Lavenda better or worse off after the price increase and
Balkaran’s offer?

** (d)**
Does her consumption of widgets increase or decrease?

On
** ONE** diagram and using budget
constraints and indifference curves, illustrate the following:

** (a)**
Lavenda spends $400 on widgets every semester. Widgets sell for $20
each.

** (b)**
A tax on widgets increases its price by 50%. Lavenda complains
about the price increase but keeps on buying the same quantity as
before.

** (c)**
To stop her endless complaints her friend Balkaran offers her $200.
Is Lavenda better or worse off after the price increase and
Balkaran’s offer?

** (d)**
Does her consumption of widgets increase or decrease?

Answer #1

a)

Lavenda spends 400 on widgets which is selling for 20.

So it can be said that Lavenda is buying 400/20 = 20 widgets.

b)

Price increases by 50%, so new price is 20 + 50%*20 = 30.

Lavenda still buys 20 widgets, costing 20*30 = 600.

Indifference curve moves left.

c)

Friend offers 200.

Lavenda spending higher amount due to increase in price = 600 - 400 = 200.

So Lavenda is neither better off or worse off according to the spending.

Indifference curve moves to the right. So, Lavenda is better off according to the indifference curve (utility).

d)

Consumption of widgets still remains same.

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Deep Change: How Operational Innovation Can Transform Your
Company
by
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