Chapter $22$ Homework

UPSCALE DINNERS

The initial budget constraint $(B{C}_1)$ shows the two friends' budget constraint when the price of an upscale dinner is $$160.$ At this price, Kevin and Maria would choose to consume two upscale dinners.

Suppose that the price of an upscale dinner decreases to $$40,$ shifting their budget constraint to $B{C}_2,$ which represents a new relative price of four diner brunches per upscale dinner. $($Hint: The blue line labeled H is parallel to $B{C}_2$ and tangent to $I_1$ at point B$.)$

To maintain the level of happiness they experienced before the price decrease$-$that is$,$ to consume at a point along the same indifference curve as they were on initially $(I_1)-$the income spent on upscale dinners and brunch at diners would now only have to be $.$ However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners.

On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price decreases from $$160$ to $$40.$ Then indicate the consumption change that results from each effect.