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3. (10 points) Nancy's preferences over x and y can be represented by u(x, y) = minfx, y}. She faces prices (Puppy) = (2,1) and
3. (10 points) Nancy's preferences over x and y can be represented by u(x, y) = minfx, y}. She faces prices (Puppy) = (2,1) and her income is 12. (a) Draw the budget constraint and indifference curve at her optimal choice. Indicate her optimal choice. (b) The price of x rises to $3 and her income stays the same. Draw her new budget constraint and indifference curve at her new optimal choice. Indicate her new optimal choice. (c) What bundle would Nancy choose if she faced the original prices and had just enough income to reach the new indifference curve? Draw the budget line that passes through this bundle at the original prices. How much income would Nancy need at the original prices to have this budget line? (d) Calculate and indicate the equivalent variation on the graph. (e) What bundle would Nancy choose if she faced the new prices and had just enough in- come to reach her original indifference curve? Draw the budget line that passes through this bundle at the new prices. How much income would Nancy have with this budget line? (f) Calculate and indicate the compensating variation on the graph. Y 16 14 12 10 0 2 4 6 10 12 14 16 X
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