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Jacob receives an allowance of $5 per week. He spends all his allowance on ice cream cones and cans of Lemon Fizz soda. If the price of ice cream...
2. Jacob receives an allowance of $5 per week. He spends all his allowance on ice cream cones and cans of Lemon Fizz soda.
i. If the price of ice cream cones is $0.50 per cone and the price of Lemon Fizz is $1 per can, draw a diagram showing Jacob’s budget constraint. Be sure to indicate on your diagram the maximum number of ice cream cones and the maximum number of cans of Lemon Fizz that Jacob can buy.
ii. Jacob buys 8 cones and 1 can of Lemon Fizz. Draw an indifference curve representing Jacob’s choice, assuming he has chosen the optimal combination.
iii. Suppose that the price of ice-cream cones rises to $1per cone. Draw in Jacob’s new budget constraint and the new optimal consumption of ice cream cones and lemon fizz.
iv. Suppose that Jacob’s allowance increases from $5 to $10 per week, show (and prices of lemon fizz and ice cream cones are as in i) how the increased allowance alters Jacob’s budget constraint.
v. Using an indifference, show how Jacob’s choice of cones and Lemon Fizz when his allowance increases. Assume both goods are normal.
vi. Using an indifference, show how Jacob’s choice of cones and Lemon Fizz when his allowance increases. Assume that Lemon Fizz is normal but cones are inferior.
