Question

arah has a utility function Utility = U(X, H) where H = g(m, D. X is (non-medical) consumption goods, H is health, m is medical care, and D is disease. She has $2000 in (monthly) income that she splits between m, which costs $500 per unit, and X, which costs $100 per unit. Consider a graph with m on the y-axis and X on the x-axis. All on the same graph, do the following: a) Draw her budget constraint, labeling the values of the y- and x-intercepts.

Answer 1

Sarah's budget constraint on a graph with medical care (m) on the y-axis and non-medical consumption goods (X) on the x-axis shows the maximum units of each good she can purchase with her income, represented by the y-intercept (4 units of m) and x-intercept (20 units of X).

Step-by-step explanation:

When constructing the budget constraint for Sarah, who has a monthly income of $2000 that she can allocate between medical care (m) and non-medical consumption goods (X), we plot medical care on the y-axis and consumption goods on the x-axis. With medical care costing $500 per unit and consumption goods $100 per unit, the maximum amount of medical care she can purchase is 4 units (2000/500), represented by the y-intercept, and the maximum number of non-medical consumption goods is 20 units (2000/100), represented by the x-intercept. Drawing a line connecting these two points will give us Sarah's budget constraint, illustrating all the combinations of m and X she can afford.