Microeconomics 6th Edition by Robert Hall, Shirley Kuiper, Marc Lieberman

Exercise 10

The Smiths are a low-income family with $10,000 available annually to spend on food and shelter. Food costs $2 per unit,and shelter costs $1 per square foot per year. The Smiths are currently dividing the $10,000 equally between food and shelter. Use either the Marginal Utility Approach or Indifference Curve Approach.
a. Draw their budget constraint on a diagram with food on the vertical axis and shelter on the horizontal axis. Label their current consumption choice. How much do they spend on food? On shelter?
b. Suppose the price of shelter rises to $2 per square foot. Draw the new budget line. Can the Smiths continue to consume the same amounts of food and shelter as previously?
c. In response to the increased price of shelter,the government makes available a special income supplement. The Smiths receive a cash grant of $5,000 that must be spent on food and shelter. Draw their new budget line and compare it to the line you derived in part a. Could the Smiths consume the same combination of food and shelter as in part a ?
d. With the cash grant and with shelter priced at $2 per square foot,will the family consume the same combination as in part a? Why or why not?