Question
Suppose you have a fixed monthly income, and you consume only two goods, namely food and clothing, with this income. Further suppose that price of
Suppose you have a fixed monthly income, and you consume only two goods, namely food and clothing, with this income. Further suppose that price of food remains the same, while price of clothing decreases.
a) Considering clothing asnormalgood, draw a figure (properly labeling the axes and taking the clothing on horizontal axis) to show the substitution effect emanating from this price change.
b) If you do not know the nature of goods (i.e., normal, inferior, or Giffen), how would you determine their nature from such a figure? (hint: a one-sentence explanation, no figure is needed)
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