budget constraint, indifference curve
1. Martha’s income is $40k/year. She can spend it on health
care visits at $80/visit, or on groceries (standing for all other goods), which
costs $100/bag of groceries. draw Martha’s budget constraint. Using
indifference curves show martha’s optimum if she buys 300 bags of groceries per
year.
2. Suppose Martha’s income increased to $42k/year and she
increases her health care visits by 5/year. Use the graph from question 1 to
draw a new equilibrium. What is her income elasticity of demand for healthcare
visits?
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