Oranges cost $1/kg and apples also cost $1/kg. Niki has $12 to spend on apples or oranges. He chooses to buy 5 kg of apples.

1. Draw (on a diagram measuring quantity of oranges on the horizontal axis) Niki's budget line and show the optimal consumption point. Do not forget to draw the relevant indifference curve(s).
2. The government subsidizes consumption of apples so that apples now cost $0.5/kg). How does Niki's budget line change? Show graphically (on the same diagram you used to answer question 3!) his optimal choice. Can you say whether he will buy more or less apples? Would Niki be better off, or worse off than in question 3?

In addition to the subsidy from question 4, the government has decided to introduce a head tax that would just allow him to continue purchasing the basket from question 3. How large should this tax rebate be? Show (on the same diagram you drew for question 3!) the new budget line and the new optimal basket. Can you say whether he will buy more or less apples? Would Niki be better off, or worse off than in question 3?