Consider Figure 5-6.The family shown faces the budget line A₁BFZ.Health insurance is measured in $100 units and other goods in $1 units.A health insurance plan is introduced which would provide this family $15,000 worth of insurance for $4,000.The new budget constraint the family will face is:

Question

Consider Figure 5-6.The family shown faces the budget line A<sub>1</sub>BFZ.Health insurance is measured in $100 units and other goods in $1 units.A health insurance plan is introduced which would provide this family $15,000 worth of insurance for $4,000.The new budget constraint the family will face is: A) AA'Z' B) AA<sub>1</sub>BA'Z' C) A<sub>1</sub>BA'Z' D) A<sub>1</sub>A<sub>2</sub>BA'Z'

Quizplus · Accepted Answer

With the introduction of the health insurance plan, the family's total budget will increase by $4,000 while their expenditure on other goods will remain the same. Therefore, the new budget constraint will be shifted parallel upward by $4,000. The new budget constraint will be A₁BA'Z'. The family will choose the point where the new budget constraint is tangent to the highest indifference curve, which is at point A'. Therefore, the best choice is point A'.