Question
a.Create the graph of the model of consumer behavior with two goods that we used to analyze tradeoffs and describe each element. What do the
a.Create the graph of the model of consumer behavior with two goods that we used to analyze tradeoffs and describe each element. What do the lines represent and why they have the shapes that they do?
b.What is the consumer's feasible set?
c.What conditions are satisfied when the consumer is optimizing?
d.Analyze a price decrease in good 1 (along the x-axis), identifying both the changes in behavior and the intermediate (unobserved) points associated with income and substitution effects. Assume the good is a normal good and the two goods are substitutes.
e.Extra Credit (5 points) Reinterpret the same diagram in the context of producer minimizing costs (ignore part d. but discuss a.b.c. )
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