3. Joan buys gasoline and food. When the price of gasoline is $1.00 per gallon, she
buys 50 gallons per week and spends $50 on food per week. the government want to
reduce consumption of gasoline as part of an environmental policy and is considering two
alternatives. They are: (1) restrict the number of gallons of gasoline anyone can buy to
40 gallons per week, and (2) Raise the price of gasoline to $1.25 per gallon. Assume for
simplicity that food always costs $1 per unit.
(a) Show on a graph Joan’s initial budget line and the budget lines under policy (1)
and policy (2).
(b) Suppose that Joan’s most preferred market basket under policy (2) is to consume
40 gallons per week. Show this on the consumption diagram. Would Joan be better o
under policy (1) or (2)?
(c) If Joan’s preferred market basket under policy (2) is to consume 70 gallons per
week, would your answer to (b) change?
