Suppose that the only two goods you purchase are X and Y. One day the price of X goes down.
a. Illustrate your old and new budget lines.
b. Illustrate the substitution and income effects on your consumption of X.
c. What is the direction of the substitution effect? Why?
d. If X is a normal good, what is the direction of the income effect? Why?
e. If X is an inferior good, what is the direction of the income effect? Why?
f. True or False: If X is an inferior good, then a fall in price must lead to a rise in consumption, but if X is a normal good, then a fall in price might lead to a fall in consumption. Justify your answer carefully in terms of income and substitution effects.