Question
A consumer buys food and drink. As shown in the diagram below, the consumer experiences an increase in the price of food, shifting his budget
A consumer buys food and drink.
As shown in the diagram below, the consumer
experiences an increase in the price of food, shifting his budget line from BC
to BC
.
0
1
The consumer's income is 200. The optimal bundle on each budget line is shown.
(a) What is the price of food on BC
?
0
(b) What is the price of food on BC
?
1
(c) The
total effect
of the increase in price is a decline of
units of food purchased.
(d) The
substitution effect
of the increase in price is a decline of
units of food
purchased.
(e) The
income effect
of the increase in food price is a decline of
units of food
purchased.
(f) Is food a normal good or an inferior good? Which budget lines did you compare?
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