Question
1. Jim's preferences over minor league baseball tickets (X1) and minor league hockey tickets (X2) can be represented by u=X1. Jim has m = 30
1. Jim's preferences over minor league baseball tickets (X1) and minor league hockey tickets (X2) can be represented by u=X1. Jim has m = 30 to spend on tickets and initially faces prices p1 =3 and p2=6. Then the price of p1 increases to 6.
a) (5 points) Sketch a diagram showing the budget lines, Jim's optimal choices, and the associated indifference curves labeled with their utility levels for both the original and new prices. (We'll be adding to this diagram in a moment, so make it big and clear.)
b) (4 points) By adding to your diagram from a), use a graphical analysis to decompose the effect of the price change on Jim's optimal choice of X1*; using the Slutsky method. What are the substitution and income effects as a result of this price change?
c) (5 points) What is the equation of the budget line that you added to your diagram in part b)? Explain why that's the equation of the budget line you added, with reference to both the specific numbers in your equation and to the point of the Slutsky decomposition.
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