Assignment Task: Rachel has an income of $10 which she spends on burritos and other goods ("other goods" represents a composite of all other goods). The price of burritos is $1 as is the price of other goods.
(a) Suppose the government agrees to pay half of Rachel's burrito bill, so burritos now cost her $0.50 apiece. She now chooses to buy eight burritos. On a graph with Burritos on the x-axis and other goods on the y-axis, draw Rachel's budget constraints before and after the subsidy program. Also include an indifference curve and the coordinates of Rachel's optimal bundle with the subsidy.
(b) Now, suppose the government ends the program in part a. and replaces it with a new and simpler program: Rachel just gets a cash gift of $4. Show his new budget line. Is Rachel still able to afford her optimal bundle that she chose with the subsidy?
(c) How much does each program cost the government? Which program does Rachel prefer? Explain.