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Drop down options   1st drop down options- A. Better B. Worse   Columns Represented By drop down options A. A to B B. A to C C. B to C   Consumption Change drop down options A. 1 fewer B. 1 more C. 2 fewer D. 2 more   In this case, the price increases of upscale dinners causes the real income of two friends to decrease or increase. Because of the change to Antonio and Caroline's real income and the direction of the income effect, upscale dinners are a normal good or an inferior good for the friends.

Drop down options   1st drop down options- A. Better B. Worse   Columns Represented By drop down options A. A to B B. A to C C. B to C   Consumption Change drop down options A. 1 fewer B. 1 more C. 2 fewer D. 2 more   In this case, the price increases of upscale dinners causes the real income of two friends to decrease or increase. Because of the change to Antonio and Caroline's real income and the direction of the income effect, upscale dinners are a normal good or an inferior good for the friends.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Drop down options

 

1st drop down options-

A. Better

B. Worse

 

Columns

Represented By drop down options

A. A to B

B. A to C

C. B to C

 

Consumption Change drop down options

A. 1 fewer

B. 1 more

C. 2 fewer

D. 2 more

 

In this case, the price increases of upscale dinners causes the real income of two friends to decrease or increase. Because of the change to Antonio and Caroline's real income and the direction of the income effect, upscale dinners are a normal good or an inferior good for the friends.

9. Income and substitution effects Antonio and Caroline are two friends living in Denver 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 I₁ and I₂ represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $500 available to spend on going out to eat, and further, that the price of a diner brunch is always $5. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. DINER BRUNCHES 0 A CII III NI M 11 LIN | | | BC, 7 8 UPSCALE DINNERS H BC ?
Transcribed Image Text:9. Income and substitution effects Antonio and Caroline are two friends living in Denver 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 I₁ and I₂ represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $500 available to spend on going out to eat, and further, that the price of a diner brunch is always $5. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. DINER BRUNCHES 0 A CII III NI M 11 LIN | | | BC, 7 8 UPSCALE DINNERS H BC ?
The initial budget constraint (BC₁) shows the two friends' budget constraint when the price of an upscale dinner is $25. At this price, Antonio and Caroline would choose to consume eight upscale dinners. Suppose that the price of an upscale dinner increases to $50, shifting their budget constraint to BC2, which represents a new relative price of ten diner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC and tangent to ₁ at point B.) To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as they were on initially (11)-the income spent on upscale dinners and brunch at diners would now have to be S . 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. On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Upscale Dinners Substitution Effect Income Effect Consumption Change Represented By... (Quantity of upscale dinners) In this case, the price increase of upscale dinners causes the real income of the two friends to Caroline's real income and the direction of the income effect, upscale dinners are Because of the change to Antonio and for the friends.
Transcribed Image Text:The initial budget constraint (BC₁) shows the two friends' budget constraint when the price of an upscale dinner is $25. At this price, Antonio and Caroline would choose to consume eight upscale dinners. Suppose that the price of an upscale dinner increases to $50, shifting their budget constraint to BC2, which represents a new relative price of ten diner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC and tangent to ₁ at point B.) To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as they were on initially (11)-the income spent on upscale dinners and brunch at diners would now have to be S . 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. On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the price increases from $25 to $50. Then indicate the consumption change that results from each effect. Upscale Dinners Substitution Effect Income Effect Consumption Change Represented By... (Quantity of upscale dinners) In this case, the price increase of upscale dinners causes the real income of the two friends to Caroline's real income and the direction of the income effect, upscale dinners are Because of the change to Antonio and for the friends.
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