Search th Homework (Ch 21) 9. Income and substitution effects Larry and Megan are two friends living in Dallas who love to try different restaurants in their city, but have specific preferences regarding venues for certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves I1 and 12 represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $500 available to spend on going out to eat, and further, that the price of a diner brunch is always $5. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. (?) R 8 9 DINER BRUNCHES MODO Apr 28 hp O\fC My Vel - Hilton C My Ov * Dashb + ng.cengage.com/staticb/ui/evo/index.html?deploymentId=56736619720212108401873280819&elSBN=9781337096577&id=1990099467&snapshotld=3804. LEKS - Nicholas. A ALEKS - Nicholas. ALEKS-ONLINE Q. ru C4ELink: Log in to t. CENGAGE | MINDTAP Q Sear Homework (Ch 21) The initial budget constraint (BC1) shows the two friends' budget constraint when the price of an upscale dinner is $25. At this price, Larry and Megan would choose to consume eight upscale dinners. Suppose that the price of an upscale dinner increases to $50, shifting their budget constraint to BC2, which represents a new relative price of ten diner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC2 and tangent to /1 at point S.) To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as they were on initially (1)-the income spent on upscale dinners and brunch at diners would now have to be |$ . However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners. worse better On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Consumption Change Upscale Dinners Represented By... (Quantity of upscale dinners) Substitution Effect Income Effect . Because of the change to Larry and In this case, the price increase of upscale dinners causes the real income of the two friends to MO hpHomework (Ch 21) To maintain the level of happiness they experienced before the price increase-that Is, to consume at a point along the same indifference curve as they were on initially (1)-the income spent on upscale dinners and brunch at diners would now have to be |$ . However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners. On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Consumption Change Upscale Dinners Represented By... (Quantity of upscale dinners) Substitution Effect Income Effect R to S In this case, the price increase R to Tale dinners causes the real income of the two friends to . Because of the change to Larry and Megan's real income and the of the income effect, upscale dinners are for the friends. S to T Grade It Now Save & Continue Continue without saving O MOLO hpMy Ve Hilton C WOW ng.cengage.com/staticb/ui/evo/index.html?deploymentld=56736619720212108401873280819&elSBN=9781337096577&id=1990099467&snapshotld=3804. LEKS - Nicholas. A ALEKS - Nicholas. ALEKS -ONLINE Q. ^ C4ELink Log in to t. CENGAGE | MINDTAP Homework (Ch 21) To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as they were on initially (1)-the income spent on upscale dinners and brunch at diners would now have to be $ . However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners. On the following table, indicate which point movement rep 1 fewer e substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption 1 more fat results from each effect. Cons 2 fewer Change Upscale Dinners Represented By... (Quantit le dinners) 2 more Substitution Effect Income Effect In this case, the price increase of upscale dinners causes the real income of the two friends to . Because of the change to Larry and Megan's real income and the direction of the income effect, upscale dinners are for the friends. Grade It Now Save & Continue Continue without saving O ETo maintain the level of happiness they experienced before the price Increase-that is, to consume at a point along the same indifference curve as they were on initially (/1)-the income spent on upscale dinners and brunch at diners would now have to be $ . However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners. On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Consumption Change Upscale Dinners Represented By... (Quantity of upscale dinners) Substitution Effect decrease Income Effect increase In this case, the price increase of upscale dinners causes the real income of the two friends to . Because of the change to Larry and Megan's real income and the direction of the income effect, upscale dinners are for the friends. Grade It Now Save & Continue Continue without saving O E MO hpmework (Ch 21) To maintain the level of happiness they experienced before the price Increase-that is, to consume at a point along the same indifference curve as they were on initially (1)-the income spent on upscale dinners and brunch at diners would now have to be | $ . However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners. On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Consumption Change Upscale Dinners Represented By... (Quantity of upscale dinners) Substitution Effect Income Effect an inferior good a normal good In this case, the price increase of upscale dinners causes the real income of the . Because of the change to Larry and Megan's real income and the direction of the income effect, upscale dinners are for the friends. Grade It Now Save & Continue Continue without saving OFMODO hp