Each week, Jane selects the quantity of two goods, x1 and x2, that she will consume in order to maximize her utilities. She spends her entire weekly income on these two goods. Her choices are as follows.

Draw a budget line-indifference curve graph that illustrates Jane’s three chosen bundles. What can you say about Jane’s preferences in this case? 

Identify the income and substitution effects that result from a change in the price of good x1.

 

X1 X2 P1 P2 Week 1 12 24 2 1 48 Week 2 16 32 1 1 48 Week 3 12 24 1 1 36