Problem 5

Olivia has received a $15 gift certificate that is redeemable only for roasted peanuts. Bags of roasted peanuts come in two sizes, regular and jumbo. A regular bag contains 30 peanuts and a jumbo bag contains 50. A regular bag costs 50 cents. Olivia cares only about the total number of peanuts. Using graphs, show how to decompose the effects of the following uncompensated changes in the price of a large bag into substitution and income effects:

(a)the price of a large bag falls from $1.25 to $1.00

(b) the price of a large bag falls from $1.00 to $0.75;

(c) the price of a large bag falls from $0.75 to $0.60