Suppose that there are two goods x1 and x2 Suppose that the

Suppose that there are two goods, x_1 and x_2. Suppose that the initial prices are given p_1 = 1 and p_2 = 2 and the income is given 100. There are two possible policies that the government is considering: Policy 1 is a bulk penalty only on good I, because any consumption more than 80 units of good 2 generates some negative impact on the economy, say, pollution or congestion. So, for each additional unit of x_1 more than 80, the new price of $2 will be applied. Policy 2 is a bulk discount only on good 2. For each additional unit of x_2 more than 20, the new price of $1 will be applied. Suppose that no policy is implemented. Write down the budget set and draw it in a graph. Suppose that only Policy I is implemented. Write down the budget set and draw it in a graph. For that, consider the two separate cases. o leq x_1 leq 80: figure out the price of each good and calculate the expenditure with that price. Draw the budget set for the area 0 leq x_1 leq 80 x_1> 80: figure out the prices of each good and calculate the expenditure with that price. Note that the price of good I changes: $I for the first 80 units and $2 after that. Draw the budget set for the area x_1

Solution

1) x₁+2x₂ less than or equal to 100.

2) i) x₁+2x₂ less than or equal to 100.

ii) 2x₁+2x₂ less than or equal to 100.

3) i) x₁+2x₂ less than or equal to 100.

ii)x₁+x₂ less than or equal to 100.

4) i) x₁+2x₂ less than or equal to 100.

ii) x₁+x₂ less than or equal to 100.

iii) 2x₁+2x₂ less than or equal to 100.

iv) 2x₁+x₂ less than or equal to 100.