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Budgets and rising medical costs

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Over the past decade medical costs have increased more rapidly than other prices. In order to illustrate how rising medical costs have affected consumer alternatives, let X represent the quantity of medical services, and let Y represent the quantity of other goods. Furthermore, let income (M) be measured in hundreds of dollars, the price of medical services and other goods in terms of dollars per minute, with M=100, Px=4, and Py=5.

a)Graph the budget line, and determine the market rate of substitution.
b)Explain and illustrate the budget set.
c)Show in your graph what happens to the budget constraint if increases to $10.
d)What is the meaning of the slope of the two budget constraints?
(NOTE: Label all graphs)

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Solution Preview

See the attached file. When the price of X is 4, the most the person can buy is 25 units (4 x 25 = 100). When the price of Y is 5, the most that can be purchased is 20 units. These are the intercepts for the Y and X axes. The budget line connects these points, indicating different possible combination that can be purchased with the $100 budget. The market ...

Solution Summary

Budget constraints with respect to health care spending