Answer Happy

Question 3 (Budget Constraint). Vince consumes gas (x1) and food (x2). Suppose the price of gas is $5 per gallon and the price of food is $10 per pound. Vince has $200 per week that he spends on the two goods. a) Draw his weekly budget constraint and put gas on the horizontal axis (food on vertical axis). Label the axes, intercepts, and slope of the budget line. (Note: draw a large graph) b) Suppose there is a gas shortage and the government limits the amount of gas to 30 gallons per consumer per week. Draw this new budget constraint on the graph above (you may use dashed line to reflect ration c) Alternatively instead of the ration in part b)), suppose the price of gas increases to $8 per gallon. Draw this new budget constraint on the graph above. d) Does Vince prefer the ration or the increase in prices? Explain why. If his preference cannot be determined, explain why not.