Your Drink Budget Is Entirely Split Between Bottled Water and Fancy

question 17

Essay

Your drink budget is entirely split between bottled water and fancy liqueurs, and your tastes are quasilinear in bottled water.In an attempt to get people to drink more water, the government introduces a subsidy that lowers the price of bottled water.
a.In a graph with bottled water on the horizontal and fancy liqueurs on the vertical axis, illustrate your before-subsidy budget and your optimal bundle A.
b.As a result of the water subsidy, I notice you consume more fancy liqueur.Illustrate this in your graph using income and substitution effects.
c.You and I are good friends, in part because I confided in you some time ago that I, too, have tastes that are quasilinear in water.(Nothing bonds like quasilinearity!) But, after the subsidy is introduced, you observe that I, unlike you, have reduced my consumption of fancy liqueurs.Your other friends claim that this is proof that our friendship is based on a fiction --- that I cannot possibly also have quasilinear tastes.Illustrate in a graph why your friends are wrong.
d.If we both have quasilinear tastes, can you explain what the fundamental difference in our tastes is that accounts for the difference in behavior?

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Definitions:

Affiliation

The relationship or connection between individuals or organizations, typically characterized by a shared purpose or common goals.

Process of Adjustment

The psychological and behavioral process by which individuals adapt to new conditions, circumstances, or environments.

Coping

The strategies or mechanisms individuals use to manage stress, adversity, or emotional distress.

Experimental Group

The subjects in an experiment who receive some special treatment in regard to the independent variable.