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EXERCISE 2 A consumer has preferences represented by u(:c1,:c2) = min{a:1,:1:2}, where 56 is the quantity of good i = 1, 2. She faces prices (191,192) = (2, 1) and her income is $12. (1) Draw on a graph some of this consumer's indifference curves and her budget constraint. What is her optimal bundle? (2) The price of good 2 rises to $3 and the consumer's income stays the same. Draw her new budget constraint on the graph and label it clearly. What is the new optimal bundle? (3) What bundle would she choose if she faced the original prices and had just enough income to reach the new indifference curve? Draw the budget line that passes through this bundle at the ouiginal prices. How much income would the consumer need at the original prices to have this budget line? (4) What is the maximum amount that she would pay to avoid the price increase? Is this the compensating or the equivalent variation? (5) What bundle would the consumer choose if she faced the new prices and had just enough income to reach her original indifference curve? Draw the budget line that passes through this bundle at the new prices. How much income would she have with this budget? (6) In order to be as well-0H as she was with her original bundle, by how much would the consumer's income have to rise? Is this the compensating or the equivalent variation