Last year, the price of heating oil was $4 per gallon, and Jonetta purchased 100 gallons of heating oil. This year, the price of heating oil falls to $3 per gallon while Jonetta's income is unchanged. Jonetta decides to share her good fortune by giving her retired father a gift of $100. Consider an indifference curve-budget line diagram with heating oil on the horizontal axis and "all other goods" on the vertical axis.

(i) Does the price change make Jonetta's budget line flatter or steeper? Justify your choice.
(ii) After Jonetta gives the $100 gift, will her new budget line lie above, lie below, or pass through her initial optimum? Justify your choice.
(iii) Sketch an indifference curve-budget line diagram that illustrates this situation. This year, will Jonetta be better or worse off than she was last year?

(i) The relative price of heating oil has fallen, so Jonetta's budget line has become flatter.

(ii) Last year, Jonetta spent $400 on heating oil. This year, Jonetta could purchase the same amount of heating oil for $300; the $100 gift would allow her to keep her consumption of all other good unchanged from last year. After the gift, Jonetta has just enough income to continue purchasing the same basket as she purchased last year, so her new budget line must pass through her initial optimum.

(iii) As shown in the accompanying diagram, Jonetta reaches a higher indifference curve, so she is better off this year than she was last year.