Question
Suppose you have $100 in income and the price of a slice of pie is $2 and the price of slice of cake is $4.
Suppose you have $100 in income and the price of a slice of pie is $2 and the price of slice of cake is $4. (a) graph your budget constraint and identify a utility maximizing bundle with an indifference curve, (b) graph the budget constraint if the slice of cake decreases to $2, (c) describe and include in your graph (or another graph if things get too difficult to read) the individual impacts on the total change in consumption due to the substitution effect and the income effect. Be sure to state the assumptions you make about the pie and cake as goods.
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