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Question: a draw and label completely axes intercepts budget constraints a...

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(a) Draw and label completely (axes, intercepts, budget constraints) a diagram describing a consumer’s choice regarding consumption of rice and other items when she has Y rupees of income and faces prices Pr in rupees per unit of Rice and Po per unit of All Other Goods. Label the budget constraint BC1. Put Rice on the y axes and All Other Goods on the x axis.

(b) Construct the new budget constraint (on the same graph) she would face if she were offered the opportunity to purchase a limited quantity R of rice at a subsidized price Ps, which is
lower than Pr. You may assume that R is less than Y/Pr. Label the new budget constraint BC2. Put Rice on the y axes and All Other Goods on the x axis.

(c) Is the consumer better or worse off than if they got a cash transfer worth R*(Pr - Ps) rupees (an “equivalent” cash transfer)? Explain using your diagram.

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