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Attempts Attempt $1$ score is$2$

Keep the Highest $2$ out of $52/5$

$1.$ Deriving the compensated demand curve

The following graph shows Yvette's budget constraint $($BC$)$ for milk and all other consumption goods. The indifference curve $($IC$)$ on the graph represents her preferences for these goods. Point A indicates the best bundle under these circumstances. $($Note: Budget constraint BC is tangent to IC at point A$,$ and budget constraint CB is tangent to IC at point B$.$ Select any of the points on the graph to see its coordinates.$)$

OTHER CONSUMPTION $($Dollars per month$)$MILK $($Gallons per month$)$ICCBABBC

Suppose that you are interested in deriving Yvette's compensated demand curve for milk. When the price of milk is

per gallon, point A represents the best bundle, and the indifference curve IC represents the utility level achieved at that bundle. In order to derive the compensated demand curve, you need to know how much milk Yvette will consume at a different price, holding this utility level constant. Since the budget constraint CB is tangent to IC at point B$,$ it represents the compensated budget for Yvette when the price of milk is

per gallon.

On the following graph, use the blue line $($circle symbol$)$ to graph Yvette's compensated demand for milk $($Compensated D$)$ at the two prices you previously calculated. $($Note: Assume that this curve is a straight line in this case.$)$

Compensated D$012345678910109876543210$PRICE $($Dollars per gallon$)$QUANTITY $($Gallons of milk per month$)$

True or False: Since the compensated demand curve for milk represents Yvette's marginal willingness to pay $($MWTP$)$ for milk given a utility level represented by IC$,$ it must be the case that the MWTP curve always slopes upward.

True

False

Suppose you wanted to derive the compensated demand curve for Yvette at a lower level of utility.

On the following graph, show the effect this has on the compensated demand curve you previously derived if milk is a normal good.

Compensated DCompensated D$$

If milk is a normal good, the uncompensated demand curve for milk is$$the compensated demand for milk.