Thomas spends his entire food budget on soup and pasta. His preferences are complete, transitive, monotonic, and convex. His income-consumption curve, with soup plotted on the x- axis and pasta on the y-axis, is a horizontal line. Suppose the price of soup decreases, all else constant. a. Create a chart to show the total, income, and substitution effects on soup and pasta of the decrease in the price of soup. b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to label each effect on your graph (or through the chart from part a) and plot soup on the x-axis and pasta on the y-axis.
Thomas spends his entire food budget on soup and pasta. His preferences are complete, transitive, monotonic, and convex. His income-consumption curve, with soup plotted on the x- axis and pasta on the y-axis, is a horizontal line. Suppose the price of soup decreases, all else constant. a. Create a chart to show the total, income, and substitution effects on soup and pasta of the decrease in the price of soup. b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to label each effect on your graph (or through the chart from part a) and plot soup on the x-axis and pasta on the y-axis.
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:Thomas spends his entire food budget on soup and pasta. His preferences are complete,
transitive, monotonic, and convex. His income-consumption curve, with soup plotted on the x-
axis and pasta on the y-axis, is a horizontal line. Suppose the price of soup decreases, all else
constant.
a. Create a chart to show the total, income, and substitution effects on soup and pasta of the
decrease in the price of soup.
b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to
label each effect on your graph (or through the chart from part a) and plot soup on the x-axis
and pasta on the y-axis.
Transcribed Image Text:Jerry spends his entire budget on bread and gasoline. His preferences are complete, transitive,
monotonic, and convex. For Jerry, bread is an inferior good that follows the law of demand.
Moreover, his cross-price elasticity of demand for gasoline with respect to the price of bread is
negative. Suppose the price of bread increases, all else constant.
a. Create a chart to show the total, income, and substitution effects on bread and gasoline of the
increase in the price of bread.
b. Use budget lines and indifference curves to graphically illustrate the three effects. Be sure to
label each effect on your graph (or through the chart from part a) and plot bread on the x-axis
and gasoline on the y-axis
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