Budget Constraint

timer Asked: Dec 15th, 2015

Question description

Suppose that Norton’s income is $70,000 per year. He can spend it on healthcare visits (V) or on all other goods (OG). The price per V is $200, and the price per OG is $50.

a. Draw Norton’s budget constraint (put V on the horizontal and OG on the vertical axis). Using indifference curves, show Norton’s optimum if he buys 1360 OG per year.

b. Suppose that Norton’s falls to $50,000 per year, and that in response he decreases his consumption of V by 2. Show the new equilibrium point on the graph. What is his income elasticity of demand for V? 

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