Indifference curves: Consumption in short and long run… 1 answer below »

Rational Addiction question
The rational addiction model helps formalize the way that addiction builds and delivers some nuanced predictions about how prices, for example, should affect new users versus current users of an addictive good. What does it predict for changes in income? Consider the case of cigarettes:
a. The following axes show two indifference curves, one for an addicted smoker consuming at the steady state quantity of cigarettes, and one for a non-smoker. The two face the same budget constraint. What would happen to cigarette consumption for each person in the short-run if income were to increase? xt
Ct
b. Now locate those two people on this figure, which corresponds to their lower income budget constraint. Show what happens to short-run and long-run cigarette consumption for each person when income rises.
Ct
oSt
ct (st)
St

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