Anna's initial consumption bundle consists of 10 units of apples and 20 units of bananas. The...

 

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Anna's initial consumption bundle consists of 10 units of apples and 20 units of bananas. The price of apples decreases from $5 to $4, while the price of bananas remains constant at $2. As a result, Anna's consumption of apples increases to 15 units. a. Determine the income and substitution effects of this price change in terms of Anna's consumption of apples and bananas. Explain your answer using a graph. b. Illustrate the substitution effect on a graph by showing the new budget line and the new consumption bundle resulting from the change in the price of apples. Explain how the substitution effect leads to a change in the consumption of apples. c. Show the income effect on a separate graph by adjusting Anna's budget line to reflect the change in her purchasing power after the price change. Explain how the income effect influences Anna's consumption of apples. d. Compare and analyze the magnitude and direction of the income and substitution effects. Discuss their combined impact on Anna's consumption choices. Anna's initial consumption bundle consists of 10 units of apples and 20 units of bananas. The price of apples decreases from $5 to $4, while the price of bananas remains constant at $2. As a result, Anna's consumption of apples increases to 15 units. a. Determine the income and substitution effects of this price change in terms of Anna's consumption of apples and bananas. Explain your answer using a graph. b. Illustrate the substitution effect on a graph by showing the new budget line and the new consumption bundle resulting from the change in the price of apples. Explain how the substitution effect leads to a change in the consumption of apples. c. Show the income effect on a separate graph by adjusting Anna's budget line to reflect the change in her purchasing power after the price change. Explain how the income effect influences Anna's consumption of apples. d. Compare and analyze the magnitude and direction of the income and substitution effects. Discuss their combined impact on Anna's consumption choices.

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a To determine the income and substitution effects of the price change on Annas consumption of apples and bananas we need to analyze the changes in her consumption choices We can begin by plotting Ann... View the full answer