Peter loves spicy food. He consumes both Laoganma chili crisp and Texas Pete hot sauce. His annual budget curve maps from (20 bottles of Laoganma, 0 cups of Texas Pete) to (0 bottles of Laoganma, 24 bottles of Texas Pete). a) Draw his budget constraint. Express the price of Texas Pete, in terms relative to the price of Laoganma. b) Given this set up, would Peter ever consume at the following points of (#bottles of Laoganma, #bottles of Texas Pete)? Why/why not? If we would consume at this point, draw an indifference curve that would justify this decision. i) (12, 12) ii) (6, 15) iii) (6, 6) iv) (12, 10) c) Imagine that Peter consumes 4 bottles of Laoganma. How many bottles of Texas Pete will he consume?
Peter loves spicy food. He consumes both Laoganma chili crisp and Texas Pete hot sauce. His annual budget curve maps from (20 bottles of Laoganma, 0 cups of Texas Pete) to (0 bottles of Laoganma, 24 bottles of Texas Pete).
a) Draw his budget constraint. Express the
b) Given this set up, would Peter ever consume at the following points of (#bottles of Laoganma, #bottles of Texas Pete)? Why/why not? If we would consume at this point, draw an indifference curve that would justify this decision.
i) (12, 12) ii) (6, 15) iii) (6, 6) iv) (12, 10)
c) Imagine that Peter consumes 4 bottles of Laoganma. How many bottles of Texas Pete will he consume?
d) Now imagine that the price of Texas Pete doubles. Draw the new budget constraint in Laoganma / Texas Pete space.
e) Assume Peter goes from the consumption point found in part c of this question to a new point where he consumes 5 bottles of Laoganma to some new consumption point defined by the budget constraint in part d. Graphically depict his new consumption bundle and the income and substitution effect in his coming to his new consumption bundle (this does not have to be precise – just graph it showing you understand the concepts).
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