Question
Sarah purchases two goods, potato and apple. She has a diminishing marginal rate of substitution of potato for apple. Assume that she has smooth and
Sarah purchases two goods, potato and apple. She has a diminishing marginal rate of substitution of potato for apple. Assume that she has smooth and convex indifference curve. Let T denote the quantity of potato and A the quantity of apple. Suppose that the price of potato decreases from ????T to ????'T . On a clearly labeled graph(s), illustrate the income and substitution effects of the price change on the consumption of potato. Do so for each of the following cases.
(a) Case 1: Potato is a normal good.
(b) Case 2: Potato is an inferior good but not a Giffen good.
(c) Case 3: Potato is a Giffen good.
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