Andre has a salary of $1000. He spends his entire budget on shoes and beers. The cost for a pair of shoes is $15 and the cost for can of beer is $25. 1. Suppose that the price of beers fell from $25 per beer to $15. Construct Andre’s new budget constraint. What is the difference between the new and old budget constraints. 2. Explain the relationship between the budget constraint and indifference curve at consumer optimum.

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Revealed Preferences and Budget Constraint Analysis

Revealed means “Let Out,” and Preference means “Choice”; Choice Reveals Preference.