Josie gets great pleasure from eating flan. Her preferences for flan and tofu are given in the graph at right. Suppose that Josie€™s income is $40, and that tofu costs $1.

a. Draw budget constraints for Josie given three different prices for flan: $5, $8, and $10.
b. Find the optimal consumption of flan at each of those prices.
c. What will Josie€™s demand curve for flan look like? Describe it in terms of the elasticity of demand.
d. What can you say about the size of the income and substitution effects of a change in the price of flan?

Transcribed Image Text:

Tofu 40 30 20 U. 10 U2 l 2 3 4 5 6 7 8 9 10 Flan