Explore BrainMass

Budget Constraint - Indifference Curve of Imperfect Substitutes

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.)

Solution Summary

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