Juliette spends $48 each month on Oreo cookies (which cost $2 per package) and salt and vinegar chips (which cost $3 per bag). 

a. With chips on the horizontal axis, draw Juliette’s budget constraint, making sure to indicate the horizontal and vertical intercepts.

b. Suppose that at current prices, Juliette purchases 6 bags of chips each month. Draw an indifference curve tangent to Juliette’s budget constraint consistent with this choice (assume Juliette is maximizing her utility). Label her chosen bundle with the letter A. How many packages of Oreos does Juliette buy?

c. Suppose that the price of chips falls to $2 per bag, and Juliette increases her chip consumption to 8 bags each month. Draw Juliette’s new budget constraint and indicate her chosen bundle with an appropriately drawn indifference curve. Label her utility-maximizing bundle with the letter B. (Be sure to determine the right quantities of both chips and Oreos!)

d. A major chip producer has experienced a fire, and the disruption of supply has caused the price of chips to increase to $4. As a result, Juliette cuts her consumption of chips to 5 bags per month. Draw Juliette’s new budget constraint and indicate her chosen bundle with an appropriately drawn indifference curve. 

Label her utility-maximizing bundle with the letter C. (Again, be sure to determine the right quantities of both chips and Oreos!)

e. Draw a new diagram below your indifference curve diagram. Use your answers to parts(b)–(d) to draw Juliette’s demand for chips. Indicate her quantities demanded at prices of $2, $3, and $4. Is there an inverse relationship between price and quantity demanded?