Question

Janet has an annual budget of $20,000 that she can spend either on food (F) or on "other goods" (OG) Typically, "all other goods" cost $1.00 per unit, and "food" also costs $1/pound. At these prices, Janet’s utility maximizing choice is to consume 5000 pounds of food annually, and 15,000 units of "other goods." (Note: please draw food on the horizontal axis).

A. Draw Janet’s budget line, and utility maximizing point of consumption. Write down the equation of her budget line (i.e., budget function).

B. What is the slope of Janet’s budget line?

Suppose a long season of drought leads to widespread food shortages. To prevent food prices from spiraling up, the government decides to ration food for every citizen while keeping food prices at the pre-drought level of $1.00/Pound. (All other prices also remain the same.) Each person’s food consumption is restricted to 2,500 Pounds per year.

C. Does Janet’s budget line change?

D. Draw her new consumption choice point after the rationing. Is she on a different indifference curve? Is she better off or worse off than before? Why?

Answer 1

Janet's budget line equation is F + OG = 20,000, with a slope of -1. After food rationing, her budget line remains the same, but her consumption choice point changes, placing her on a lower indifference curve and making her worse off since her utility is reduced.

Step-by-step explanation:

When Janet has an annual budget of $20,000 that she can spend on food (F) or on "other goods" (OG), her budget line can be represented by the equation F + OG = 20,000, where F is the amount spent on food and OG is the amount spent on other goods. Since the price of both food and other goods is $1 per unit, the slope of the budget line is -1, reflecting an equal trade-off between the two goods. Assuming Janet is maximizing her utility, her original choice would be to consume 5,000 pounds of food and 15,000 units of other goods.

With the introduction of food rationing due to a drought, where each person is restricted to 2,500 pounds of food per year, Janet's budget line does not change as prices have remained the same; however, her consumption choice is now limited by the ration. Consequently, Janet may have to consume 2,500 pounds of food and up to 17,500 units of other goods (budget-allowing), leading to a new consumption choice point. Janet will clearly be on a different indifference curve - one that represents a lower level of satisfaction since she is now unable to choose a combination of goods that gave her the maximum utility before the ration. Thus, Janet is objectively worse off because her available choices are reduced, and she cannot achieve the same level of satisfaction that was possible before the rationing.