The initial budget constraint (8C1) shows the Joneses' budget constraint when the price of a fancy dinner is $160. At this price, Gilberto and Juanita would choose to consume two fancy dinners. Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC;, which represents a new relative price of four diner breakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to 3C2 and tangent to I] at point 5.) in order to remain as happy as they were before the price decreasethat is, to consume at some point on the same indifference curve as they were on initially (I1)the;loneses' income spent on fancy dinners and breakfast at diners would now only have to be-. However, in reality, rather than maintaining their original level of utility, the Joneses choose the optimal bundle along their new budget constraint. At this point, they are V off than before the price change inkfancy dinners. On the following table, indicate which point movement represents the substitution effect and income effect for fancy dinners when the price decreases \\ from $160 to $40. Then indicate the consumption change that results from each effect. Consumption Change Fancy Dinners Represented By... ( Quantity of fancy dinners) Substitution Effect V v Income Effect V v In this case, the price decrease of fancy dinners causes the Joneses's real income to V . Because of the change to Gilberto and Juanita 5 real income and the direction of the income effect, fancy dinners are V for the Joneses. Gilberto and Juanita Jones live in Detroit and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram the purple curves 1. and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the 0 corresponding indifference curve. FANCY DINNERS