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?

Please explain in detail. Thanks for your help!!

Solution Preview

1.

As you can see, if she spends all of her money on health care, then she can have 500 visits (which implies 0 grocery). If she spends all on grocery, then she gets 400 bags. This is indicated by the budget line in picture q1.jpg.

If she buys 300 bags of grocery, she will spend 30k, which means that she has 10k left. With the remaining money, she ...

Solution Summary

The expert examines budget constraint and indifference curve. The income elasticity of demand for healthcare visits are determined.

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Budget Constraints
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