Question 4 (Budget Constraint). Suppose x1 is healthy food and x2 is unhealthy food. The price of one pound of healthy food is $5 and the price of one pound of unhealthy food is $4. Karen has $120 to spend on food each week.

a) Draw her budget constraint. Label the axes, intercepts, and slope of the budget line. (Note: draw a large graph)

b) The government wants to encourage the consumption of healthy food and gives a subsidy of $2 per pound. At the same time, the government wants to discourage the consumption of unhealthy food and imposes a $2 per pound tax. What is the new budget constraint given these two changes? Draw her new budget constraint on the graph above.

c) Is the government going to be successful in encouraging the consumption of healthy food? Briefly explain.