Katya commutes to work. She can either use public transport or her own car. Her indifference curves obey the four properties of indifference curves for ordinary goods.
a. Draw Katya's budget line with car travel on the vertical axis and public transport on the horizontal axis. Suppose that Katya consumes some of both goods. Draw an indifference curve that helps you illustrate her optimal consumption bundle.
b. Now the price of public transport falls. Draw Katya's new budget line.
c. For Katya, public transport is an inferior, but not a Giffen, good. Draw an indifference curve that illustrates her optimal consumption bundle after the price of public transport has fallen. Is Katya consuming more or less public transport?
d. Show the income and substitution effects from this fall in the price of public transport.