Question
For each of the following, graphically decompose the total effect of the price change into the substitution and income effects on a well-annotated graph. Be
For each of the following, graphically decompose the total effect of the price change into the substitution and income effects on a well-annotated graph. Be sure to clearly label each of the three effects
a. Tan spends his entire food budget on soup and pasta. Suppose you know that his preferences are complete, transitive, monotonic and convex. You also know that a graph of his incomeconsumption curve, with soup plotted on the x-axis and pasta on the y-axis, is a horizontal line. The price of soup decreases, all else constant.
b. Ray spends his entire budget on bread and gasoline. His preferences are complete, transitive, monotonic and convex. For Ray, bread is an inferior good that follows the law of demand. Moreover, the cross-price elasticity of demand for gasoline with respect to the price of bread is negative. Suppose the price of bread increases, all else constant.
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