Question
Consider a household that buys two things: gasoline and everything else. a. Draw the household's budget constraint, with gasoline on the vertical axis and everything
Consider a household that buys two things: gasoline and everything else.
a. Draw the household's budget constraint, with gasoline on the vertical axis and everything else on the horizontal axis. What are the vertical intercept, the horizontal intercept, and the slope of the budget constraint (in terms of the household's income and the prices of gasoline and everything else)?
b. How, if at all, would a rise in the household's income affect its budget constraint?
c. Suppose the price of gasoline doubles and the price of everything else rises by a much smaller amount (just a few percent). How, if at all, would this affect the household's budget constraint?
be sure to explain your answers and to use graphs whenever appropriate.
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