Suppose the only goods you buy are wine and roses.
a. Between Monday and Tuesday, the price of wine goes up (while your income remains fixed). Draw a diagram, with wine on the horizontal axis and roses on the vertical, to illustrate how your budget line moves. Illustrate your optimum points on the two budget lines, labeling Monday's optimum M and Tuesday's optimum T.
b. On Wednesday, the price of wine returns to its Monday level, but at the same moment your income falls by just enough so that you are just as happy on Wednesday as on Tuesday. Draw Wednesday's optimum point and label it W.
In each of parts (c), (d), and (e), determine whether the statement is (1) true always, (2) false always, (3) true if wine is an inferior good, but otherwise false, (4) false if wine is an inferior good, but otherwise true, (5) true if wine is a Giffen good, but otherwise false, or (6) false if wine is a Giffen good but otherwise true.
c. M is to the left of T.
d. T is to the left of W.
e. M is to the left of W.
f. True or False: Every Giffen good is an inferior good. Justify your answers by using the earlier parts of this problem, not by using the argument given in the text.