Suppose that Martha’s income rises to $42,000 per year, and that she increases her consumption of health care visits by fi ve visits. Using the graphs for Exercise 1, draw the new equilibrium. What is her income elasticity of demand for health care visits?

Exercise 1 

Suppose that Martha’s income is $40,000 per year. She can spend it on health care visits, which cost $80 per visit, or on groceries (standing for all other goods), which cost $100 per bag of groceries. Draw Martha’s budget constraint. Using indifference curves, show Martha’s optimum if she buys 300 bags of groceries per year.