1. You can buy any quantity of cooking oil at $5 per litre and any quantity of flour at $2 per kilo. You have allocated $20 to spend on cooking oil and flour.
(a) If you choose to buy 2 litres of cooking oil, what is the maximum amount of flour you can buy with your $20 budget?
(b) If you choose to buy no cooking oil, then how much flour can you afford with your $20 budget?
(c) Draw your budget constraint for cooking oil and flour.
(d) If you get hungry on the way to the shop and spend $5 of your $20 budget on a snack, then how does this affect your budget constraint for flour and oil? Show how the constraint changes in the diagram.
(e) This part is a bit more demanding, but you may find it fun. If you did not spend the $5 on a snack, so you have still $20 in your budget, then are there any prices for cooking oil and flour that would leave you with the same budget constraint as in part (d)? If you think the answer is no, you haven't thought enough.
Hint: Both of the budget constraints are straight lines. Think about what must be true about the prices
for a straight line with a $20 budget to be the same as the straight line in (d)?