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