Consider once again my tastes for Coke and Pepsi and my tastes for right and left shoes (as described in end-of-chapter exercise 6.2).
A. On two separate graphs €” one with Coke and Pepsi on the axes, the other with right shoes and left shoes €” replicate your answers to end-of-chapter exercise 6.2A(a) and (b). Label the original optimal bundles A and the new optimal bundles C.
(a) In your Coke/Pepsi graph, decompose the change in behavior into income and substitution effects by drawing the compensated budget and indicating the optimal bundle B on that budget.

Graph 7.3: Inc. and Subst. Effects for Perfect Substitutes and Complements
(b) Repeat (a) for your right shoes/left shoes graph.
B. Now consider the following utility functions: u(x1,x2) =min{x1,x2} and u(x1,x2) = x1 +x2.
(a) Which of these could plausibly represent my tastes for Coke and Pepsi, and which could represent my tastes for right and left shoes?
(b) Use the appropriate function from above to assign utility levels to bundles A, B and C in your graph from 7.3A(a).
(c) Repeat this for bundles A, B and C for your graph in 7.3 A(b).

Transcribed Image Text:

es Left shoes 20o8 original bydgeh ted100 75 5o Compensa 133 bvdjef compensaed b vdgat (oo I5o 200 Coke IDo ina ina Shoes odjaf budset