Question

'Paui loves hot drinks. and he has a part of his weekiy budget earmarked for buying- them. In the diagram below. you can find a budget line that represents how much tea and coffee Paul can afford within his budget for hot drinks and an example of an indifference curve. Tea ll] 10 Coffee a) Use the diagram to construct Paul's individual demand curve for coffee by compieting the following steps: - Amend the diagram suitabiy to nd Paul's optimal choice of hot drinks if the price of a cup of coffee increases to 1.50 and the tea price remains constant. - Repeat this step for a coffee price of 2 (again. the tea price remains constant). - Draw a new diagram ('Diagram 2') with Paul's individual demand curve for coffee. Clearly show the three points in your new diagram that correspond to Paul's optimal choices under each of the three price levels in the previous diagram. b) Pauline's preferences are identical to Paul's. Add the market demand curve for the market for coffee to your 'Diagram 2' (part a), under the assumption that Paul and Pauiine are the only consumers in the market. Clearly indicate the relative quantities for the three prices for coffee considered above, 131. 1.50, and E2