PART 1 (17 points) Income compensated budget constraint Pizza and beer consumption for Bob. 0 lnitialBudget: $75 0 Price Pizza2$15 0 Price Beer: $5 1. (2 points) Draw Bob's budget line for pizza and beer with pizza on the horizontal axis. 2. (1 point ) What is the Yintercept? (The Y-intercept is the point where the budget line crosses the Y-axis. Remember that Y-axis is the beer axis) 3. (1 point ) What is the slope of the budget line? 4. (1 point) What is the X-intercept? 5. (2 points) Suppose Bob chose to purchase 3 pizzas and 6 beers. Use the equation of Bob's budget line to show that 6 and 3 is a point on the above budget line. 6. (2 points) Suppose the price of pizza drops to $10,while the price of beer remains $5 and Bob's budget remains $75. In one drawing, redraw the original Budget line (where the price of pizza was $15) and draw a new budget constraint (I will refer to this later as Budget Line 2) where the price of pizza is $10. Your picture will have two budget lines with the second one being less steep than the original. (We will eventually draw a third budget line on this same picture) 7. (2 points) What are the Y-intercept (Beer), the slope, and the X-intercept (Pizza) for the new budget line? 8. (4 points) We are now ready to construct the income-compensated budget line. The incomecompensated budget line is used to demonstrate how a consumer will react to a change of relative prices while holding income constant. To perform this task we use Bob's original consumption bundle of 3 pizzas and 6 beers. We want to construct a budget line such that Bob can only afford to purchase 3 pizzas and 6 beers while the price of beer is $5 and the price of pizza is $10. 1. The income-compensated budget line is a line with the same slope as Budget Line 2 from above that crosses through the point (x = 3, y = 6). To solve for the income-compensated line you can use the slope intercept formula (Y = mX + b) where m is the slope and b is the Y-intercept. Simply plug in the slope from Budget Line 2 for m and then use x = 3 and y = 6 to solve for b. Once you have the equation for the income compensated budget line you can solve for the Xintercept by plugging in 0 for Y. Now add the income-compensated budget line to the drawing above making sure that the income-compensated budget line crosses through the point (x = 3, y = 6) which is also on the original budget line. 9. (2 points) At the new prices (pizza $10, beer $5) How much income does Bob need to purchase the original bundle of 3 pizzas and 6 beers? PART 2 (12 points) Suppose you have a Pizza and Beer budget of $60. The initial price of Pizza is $15 and the initial price of Beer is $5. 1. (2 points) Draw a budget line showing the different combinations of Pizza and Beer that can be consumed within the initial budget. (Hint: put pizza on the horizontal axis) 2. (2 points) Now suppose that the price of pizza drops to $10. Draw the new budget line to show the new combinations of pizza and beer that could be consumed. 3. (2 points) Suppose your initial point of consumption is 2 pizzas and 6 beers. Using this information draw a new budget constraint that keeps your relative income constant while changing the relative pricing of Pizza and Beer. 4. (3 points) Show the substitution effect of the change in price of pizza. 5. (3 points) Finally show the income effect of the relative change in income due to the change in price of pizza. For the last two items (4 & 5) you don't need to use numbers. Just show the points on the graph