Recall our friends the Mungoans of Chapter 2. They have a strange two-currency system consisting of Blue Money and Red Money. Originally, there were two prices for everything, a blue-money price and a red-money price. The blue-money prices are 1 bcu per unit of ambrosia and 1 bcu per unit of bubble gum. The red-money prices are 2 rcu’s per unit of ambrosia and 4 rcu’s per unit of bubble gum.
(a) Harold has a blue income of 9 and a red income of 24. If it has to pay in both currencies for any purchase, draw its budget set in the graph below.
(b) The Free Choice party campaigns on a platform that Mungoans should be allowed to purchase goods at either the blue-money price or the redmoney price, whichever they prefer. We want to construct Harold’s budget set if this reform is instituted. To begin with, how much bubble gum could Harold consume if it spent all of its blue money and its red money on bubble gum?
(c) How much ambrosia could it consume if it spent all of its blue money and all of its red money on ambrosia? 21
(d) If Harold were spending all of its money of both colors on bubble gum and it decided to purchase a little bit of ambrosia, which currency would it use?
(e) How much ambrosia could it buy before it ran out of that color money?
(f) What would be the slope of this budget line before it ran out of that kind of money?
(g) If Harold were spending all of its money of both colors on ambrosia and it decided to purchase a little bit of bubble gum, which currency would it use?
(h) How much bubble gum could it buy before it ran out of that color money?
(i) What would be the slope of this budget line before it ran out of that kind of money?