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Jennifer divides her income between coffee and croissants (both of which are normal goods for her). An early winter spell in Brazil causes a large
Jennifer divides her income between coffee and croissants (both of which are normal goods for her). An early winter spell in Brazil causes a large increase in the price of coffee everywhere in the world. Taking coffee on the x axis. a. Show the effect of the winter freeze on Jennifer's budget constraint. b. Show the effect of the freeze on Jennifer's optimal consumption choice assuming that the substitution effect outweighs the income effect for croissants. (Hint: increase in the price of coffee will make Jennifer feel poor. This price increase will also mean that croissants are now relatively cheaper for her. Keeping this information in mind, calculate the income and substitution effect. Keep in mind that you are asked to calculate this effect for croissants NOT coffee) c. Show the effect of the freeze on Jennifer's consumption choice assuming that the income effect is stronger than the substitution effect. (Hint: same logic as part b above)
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