Imelda consumes shoes and a composite of all other goods. For Imelda, the income

Question

Imelda consumes shoes and a composite of all other goods. For Imelda, the income effect of a change in the price of shoes is always zero. Imeldas preferences satisfy all of the usual assumptions (i.e. completeness, nonsatiation, transitivity, and convexity). Initially, Imelda consumes 4 units of shoes and 3 units of other goods. I describe this bundle with the coordinates (4,3).

Say the price of shoes rises, while Imelda’s income and the price of other goods stay constant. Given the information provided, which set of (shoe, other goods) coordinates could (possibly) constitute an optimal consumption bundle for Imelda following the price increase? (Select the correct answer, and explain why.)

a) (5,2)
b) (5,4)
c) (3,4)
d) (3,2)
e) (4,4)
f) (a), (b), (c), (d) and (e) are all possible.
g) Only (a) and (b) are possible.
h) Only (c) and (d) are possible.
i) Only (a), (b) and (e) are possible
j) Only (c), (d) and (e) are possible.
k) None of the above.

Explanation / Answer

I have only a principles course, but: a) not possible, the shoes are more expencive and you have no income effect b) same + more of both goods when price rises c) possible d) not possible, you have only income effect and the substituion effect says more of the all other goods e) not possible, how can you afford more of both goods when price rises So I say c) (3,4)

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