For dinner, Terry consumes only curry (C) and burritos (B). His monthly dinner budget m = $300. The price of a dish of curry is PC= $15 and the price of a burrito is PB= $10. a. The following figure shows two of Terrys indifference curves for curry and burritos. Recall that consumers are assumed to always want more, so the high indifference curve U1 represents higher utility. Add his budget line to the graph. (Turn in this figure, and the next, with your paper.) Remembering that any consumer will spend all their income, choosing a bundle along the budget line, how many dinners of curry does he buy? How many burritos? Indicate the optimal bundle of curry and burritos on the graph. Label it point X. C0 5 8 10 16 20 25 30 B 5 10 12 15 20 24 30 U1 U2 b. Terrys hours fall at work and his dinner budget likewise falls, to m= 240. Prices of curry and burritos remain the same as before, and he would rather go hungry than eat anything else for dinner. Add this new budget line to the figure and indicate his new optimal bundle, which will be along this new budget line. Label it point Y . c. Using the following formula for income elasticity of demand, compute the income elas- ticities for both goods: EC,Inc = % change in curry % change in income and EB,Inc = % change in burritos % change in income 1

In both cases you should use the change in the quantity of the relevant good (either curry or burritos). The change in income will be the same for both. You should also use the midpoint formula we've always used for the two % change values. d. Return to the setup of part a., with m=300 and prices PC=$15 and PB=$10. Now suppose the curry dish goes on sale this month, at the price PC=810. The next figure is to be used for this question. Draw the original badget line in the graph, and mark your original optimal bundle, X from part a. Now also draw the new budget line with the lower curry price. What is Terry's optimal bundle after the price change? Mark this point in the second graph and label it Z. e. Recall the formula for the oven-price elasticity of demand: E=%changeinpriceofcurry%changeinquantitycurry Once again using the midpoint formula, compute the own-price elasticity of demand for curry, with respect to a change in the price of curry. f. Finally, recall the formula for the cross-price elesticity of demand: E=%changeinpriceofcarry%changeinquantityburritos Still using the midpoint formula, compute the cross-price elasticity of demand for burritos, with respect to a change in the price of curry. g. Are curry and burritos substitute goods or complement goods for Terry? Explain your answer. In both cases you should use the change in the quantity of the relevant good (either curry or burritos). The change in income will be the same for both. You should also use the midpoint formula we've always used for the two % change values. d. Return to the setup of part a., with m=300 and prices PC=$15 and PB=$10. Now suppose the curry dish goes on sale this month, at the price PC=810. The next figure is to be used for this question. Draw the original badget line in the graph, and mark your original optimal bundle, X from part a. Now also draw the new budget line with the lower curry price. What is Terry's optimal bundle after the price change? Mark this point in the second graph and label it Z. e. Recall the formula for the oven-price elasticity of demand: E=%changeinpriceofcurry%changeinquantitycurry Once again using the midpoint formula, compute the own-price elasticity of demand for curry, with respect to a change in the price of curry. f. Finally, recall the formula for the cross-price elesticity of demand: E=%changeinpriceofcarry%changeinquantityburritos Still using the midpoint formula, compute the cross-price elasticity of demand for burritos, with respect to a change in the price of curry. g. Are curry and burritos substitute goods or complement goods for Terry? Explain your