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Please help ! :(( Suppose you have a Pizza and Beer budget of $60. The initial price of Pizza is $15 and the initial price
Please help ! :((
Suppose you have a Pizza and Beer budget of $60. The initial price of Pizza is $15 and the initial price of Beer is $5.
- (2 points) Draw a budget line showing the different combinations of Pizza and Beer that can be consumed within the initial budget. (Hint: put pizza on the horizontal axis)
- (2 points) Now suppose that the price of pizza drops to $10. Draw the new budget line to show the new combinations of pizza and beer that could be consumed.
- (2 points) Suppose your initial point of consumption is 2 pizzas and 6 beers. Using this information draw a new budget constraint that keeps your relative income constant while changing the relative pricing of Pizza and Beer.
- (3 points) Show the substitution effect of the change in price of pizza.
- (3 points) Finally show the income effect of the relative change in income due to the change in price of pizza.
For the last two items (4 & 5) you don't need to use numbers. Just show the points on the graph.
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