The initial budget constraint (BC1 ) shows the two friends' budget constraint when the price of an upscale dinner is $100. At this price, Carlos and Deborah would choose to consume five upscale dinners. Suppose that the price of an upscale dinner decreases to $50, shifting their budget constraint to BC2 , which represents a new relative price of five diner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC2 and tangent to I1 at point Y.) To maintain the level of happiness they experienced before the price decreasethat is, to consume at a point along the same indifference curve as they were on initially (I1 )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.

Carlos and Deborah are two friends living in San Francisco who love to try different restaurants in their city, but have specific preferences regarding venues for certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves /1 and 12 represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $1,000 available to spend on going out to eat, and further, that the price of a diner brunch is always $10. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. (? 70 2 X 50 DINER BRUNCHES 30 BC H 5 6 8 UPSCALE DINNERS