Question
5. A consumer is choosing between whiskey and beer. Their monthly budget for alcohol is $600. Suppose the price of beer is $10 and the
5. A consumer is choosing between whiskey and beer. Their monthly budget for alcohol is $600. Suppose the price of beer is $10 and the price of whiskey is $40.
a. Write the equation for the consumer's budget line.
b. Graph this line and shade the consumer's opportunity set.
c. Show how this opportunity set changes when the price of beer increases to $20. How does this change alter the market rate of substitution between whiskey and beer?
d. Returning to our original prices of $10 and $40, suppose the consumer receives a $120 gift card for whiskey. Graph their new budget line.
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