9. Income and substitution effects Edison and Hilary Garcia live in San Diego an

Question

9. Income and substitution effects Edison and Hilary Garcia live in San Diego and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $400 per month available to spend on eating out. The price of a diner breakfast is always $5. Each labeled point represents the tangency between a budget constraint and the corresponding indifference curve. 72 50 - 0 346 FANCY DINNERS

Explanation / Answer

The answers are -

a) $550

b)worseoff

c)Substituion effect

Represented by - movement from 6 - 4

Consumption change - 4

Positive or Negative - Negative

Income Effect

Represented by - movement from 4 - 3

Consumption change - 3

Positive or Negative - Negative

d) decrease

e) normal good

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