Jim buys only milk and biscuits.

a In 2004, Jim earns $100, milk costs $2 per litre and biscuits cost $4 per dozen. Draw Jim’s budget constraint.

b Now suppose that all prices increase by 10 per cent in the year 2005 and that Jim’s salary increases by 10 per cent as well. Draw Jim’s new budget constraint. How would Jim’s optimum combination of milk and biscuits in 2005 compare with his optimum combination in 2004?