The Pullman Company has a lot of pull in the town of Pullman, Illinois. Everybody in town is identical, and they all work for the company, which pays…

The Pullman Company has a lot of pull in the town of Pullman, Illinois. Everybody in town is identical, and they all work for the company, which pays them each $10 a day. Their favorite food is apples, which they get from a mail order catalogue for $1 apiece.

1.Draw the typical resident’s budget line between “apples” and “all other goods” (measured in dollars). Draw in the optimum point.

2.Pullman plans to lower the wage rate to $8 a day. Draw the new budget line.

3. Pullman has discovered that if residents are less happy than they were at $10 a day, they will all leave town. To prevent this, Pullman has offered to subsidize everyone’s apple purchases: From now on, if you are a Pullmanite who buys an apple, you will pay only a fraction of the cost and the company will pay the rest. Pullman plans to choose a fraction which is just large enough to keep people from leaving town.

4 Draw the new budget line. Indicate the new budget point. Label the corresponding quantity of apples A.

5. Use your graph to illustrate the amount that Pullman spends on the apple subsidy. (Hint: How much of your $8 income do you have left over after buying A apples? How much of your $8 income would you have left over if you bought A apples at the unsubsidized price of $1 apiece? Where is the difference coming from?

6. True or False: Pullman could end up spending just as much on the apple subsidy as it saves by lowering wages.

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