Tarek commutes on the subway, and buys all-other-goods (AOG). He has $100 to spend on subway tickets and AOG. The price of AOG is $1, and the price of a subway ride is $1, as well. At these prices he chooses to buy 45 rides, and spends the rest on AOG.
a. Draw Tarek’s budget constraint and consumption, making sure to label all axes, intercepts, and slope. On the graph, label Tarek’s consumption point.
b. On the consumption point in the graph in part (a), draw three possible indifference curves representing different preferences: AOG and subway rides are mostly substitutes; AOG and subway rides are neither substitutes nor complements; AOG and subway rides are mostly complements. Clearly label each indifference curve.
c. Now suppose the subway system has a new deal for tickets. If the commuter buys more than 50 tickets, each ticket over 50 will be priced at $0.50. Draw Tarek’s new budget constraint with on the graph in part (a), making sure to label the new intercepts and slope.
d. Will Tarek benefit from the new subway ticket deal? In answering this question, consider how the different types of indifference curves in part (b) affect your answer.