Jane budgets $100 a month for alcohol. She consumes two goods for this purpose, Gin and Tonic. The price for Gin is $25 per unit and price for Tonic is $5 per unit.
(a) Calculate and illustrate Jane’s budget constraint on a graph (with Gin on the x-axis and Tonic on the y-axis)
(2 marks)
(b) Jane decides to cut back on her drinking and now only allocates $90 a month for alcohol. Calculate and illustrate the effect on her budget constraint.
(2 marks)
(c) Assume that Gin and Tonic are perfect complements for Jane. Calculate her optimal consumption bundle and illustrate your diagram appropriately.