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Eric's preference over basketball ticket (x1) and football ticket (x2) can be represented by u = x1. He has income(m) = 20 to spend on
Eric's preference over basketball ticket (x1) and football ticket (x2) can be represented by u = x1. He has income(m) = 20 to spend on tickets and initially faces prices p1 = 2, p2 = 4. Then the price of p1 increase to 4.
1). Sketch a diagram thats shows the budget line, Eric's optimal choice, and the indifference curve with both the original price and new price.
2). Use a graphical analysis to decompose the effect of the price change on his optimal choice of x1 by using the Slutsky method. What are the substitution effect and income effect?
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