posted by Amany .
Jim buys only milk and cookies.
a. In year 1, Jim earns $100, milk costs $2 per quart, and cookies cost $4 per dozen. Draw Jim's budget constraint.
Muhammad Tayyab MInhas
a. Figure 12 shows Jim's budget constraint. The vertical intercept is 50 quarts of milk,
since if Jim spent all his money on milk he would buy $100/$2 = 50 quarts of it.
The horizontal intercept is 25 dozen cookies, since if Jim spent all his money on
cookies he would buy $100/$4 = 25 dozen cookies.
b. If Jim's salary rises by 10 percent to $110 and the prices of milk and cookies rise by
10 percent to $2.20 and $4.40, Jim's budget constraint would be unchanged. Note
that $110/$2.20 = 50 and $110/$4.40 = 25, so the intercepts of the new budget
constraint would be the same as the old budget constraint. Since the budget
constraint is unchanged, Jim's optimal consumption is unchanged.