Question
Suppose that a household has a budget of $200 a week for its weekly grocery shopping trip, where it spends its weekly budget on chicken
Suppose that a household has a budget of $200 a week for its weekly grocery shopping trip, where it spends its weekly budget on chicken priced at $10/kg and other grocery goods. Chicken and other grocery goods are imperfect substitutes/compliments for the household, that is, their preferences are convex.
a. Draw a large diagram showing the household's weekly budget constraint for chicken and $ of other goods. Label the axes, the intercepts, budget constraint and give the diagram a title. Could you please assist with the Diagram?
b. If the household is observed to buy 5 kg of chicken per week, draw an indifference curve that indicates this situation. Calculate the amount the household spends on other grocery goods and label this amount as well as their demand for chicken. Could you please assist with the Diagram?
c. Suppose due to a supply shortage, a quota is introduced limiting purchases of chicken to 2.5 kg per week. On the diagram from a. and b., draw the household's budget constraint with the quota and the highest indifference curve the household can reach. Label the household's budget constraint, demand for chicken and other goods and the indifference curve it can reach with the quota in place. Could you please assist with the Diagram?
d. Explain what has happened to the household's welfare and why. In your answer refer to the diagram and its components, but also include an explanation that is suitable for any audience.
e. How will the quota affect the welfare of other households that may have different incomes and preferences? What determines which households are worse off due to the quota?
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