Question
1) Budget Line (10 Points): Last summer I visited Germany to get married (its not important for the question...just wanted you to know). While I
1)Budget Line (10 Points): Last summer I visited Germany to get married (its not important for the question...just wanted you to know). While I was there, my family (we are a family of 5, two brothers, parents, and myself) took a bike tour to a nearby beer garden to which my brother still had a $25 gift card. Assume my family spends money on only 2 things: beer in the beer garden and Birkenstock. My family's budget for beer and Birkenstock is $100 (excluding the gift card). Beer costs $5 per liter and Birkenstock are $10.
a.For now, ignore the gift card. How much beer can my family buy? How many Birkenstock? Draw the corresponding budget line with Birkenstock on the x-axis.
b.Including the gift card, how do these quantities change? In the same graph, draw the new budget line.
c.Assume each family member wants to drink 1 liter of beer. How many Birkenstock can we buy? In the same graph, draw the corresponding indifference curve.
d.The local drunk noticed we have a $25 gift card and offered us $20 in cash for it. In the same graph, draw this budget line. What is the only rational way we would make this trade? (i.e. what would our consumption of Birkenstock and Beer have to look like for us to prefer $20 in cash over a $25 gift card?)
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