Your income is $10 and you buy sodas for $1 apiece. One day a local bully starts demanding that you buy him a soda for every soda you buy yourself. Therefore, it now costs you $2 to get a soda. In these circumstances, you choose to buy 3 sodas a day.
1) Illustrate the bully’s effect on your budget line. Illustrate your new optimum. Call it P.
2) One day, the bully announces that he’s changed his policy: You now have to buy him 3 sodas a day, regardless of how many you buy for yourself. Illustrate your new budget line. Does it go above, through, or below point P?
3) Does the bully’s change in policy make your life better or worse?