1.4. Jim buys only milk and cookies. a. In 2001, Jim earns $100, milk costs $2 per...

Question:

1.4. Jim buys only milk and cookies.

a. In 2001, Jim earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Jim’s budget constraint.

b. Now suppose that all prices increase by 10 percent in 2002 and that Jim’s salary increases by 10 percent as well. Draw Jim’s new budget constraint. How would Jim’s optimal combination of milk and cookies in 2002 compare to his optimal combination in 2001?

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