You have $20 to spend on food and clothing. The price of food is $1 and...
You have $20 to spend on food and clothing. The price of food is $1 and the price of clothing is $2. Suppose that the government subsidizes clothing such that each unit of clothing is half-price, up to the first 5 units of clothing. Graph your budget constraint in this circumstance. (Plot the quantity of food on vertical axis)
Homework Answers
The price of food is $1, therefore the quantity buy from $20 is 20 units of food.
The price of clothing is $2, therefore the quantity buy from $20 is 10 units of clothing.
But the government subsidizes clothing, for each unit of clothing is half-price, up to the first 5 units of clothing.
It means we buy 5 units of clothing at the rate of $1 per clothing. For buying 5 units of clothing, we spend $5 in total and left with $15 ($20-$5). So from this money we can buy more ($15/$2 per unit price of cloth) i.e. 7.5 units of clothing. Total quantity we can purchase of clothing by spending $20 is 5 units + 7.5 units = 12.5 units.
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