Question: Consider a (dull) world with two goods: Food and School supplies. Suppose the consumer (student) has 15 food stamps, each can be exchanged for one unit of food, and 10 dollars. A food unit costs 2 dollars in the market and school supplies cost 1 dollar per unit.

1. Suppose the student cannot sell her food stamps. Carefully depict the budget set. For simplicity assume that the student can only sell food stamps in the market (or that if she buys, she has to pay 2 dollars for a stamp. Both assumptions should give you the same result).
2. Assume instead that there is a black market for food stamps, where a stamp sells for a dollar. Carefully depict the new budget set.
3. Depict a graph with the budget sets derived above and some indifference curves representing some preferences of the student over food and school supplies. How is the consumer affected by a successful elimination of the black market?

Price: $2.99

Solution: The downloadable solution consists of 4 pages
Deliverable: Word Document