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    Budget Constraint - Indifference Curve of Imperfect Substitutes

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    Please help with the following problems. Provide diagrams and step by step calculations.

    Josh has $100 available for school supplies, S, and food, F, from Meijer (Local general merchandise store). The price of each unit of school supplies is $1 and each unit of food is $1. Josh spends $10 on 10 units of school supplies and $90 on 90 units of food.

    a) Draw the budget constraint. (Put School supplies, S, on the X axis and Food, F, on the Y axis). Draw the indifference curve that includes (S = 10, F = 90). S and F are imperfect substitutes.

    b) Meijer sends you a coupon for $20 which can be used only for school supplies. Draw the new budget constraint. Is Josh better off? Would he prefer a general $20 coupon (can be used for school supplies or food) to the school supply coupon? Show this on your graph. (Be sure that your graph is consistent with your answer.)

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    Solution Summary

    The following problem helps with problems involving budget constraints. Step by step calculations are provided for each.