Question #7: There are two goods in the world: eggplants and canned peas. Canned peas are an inferior good while eggplants are a normal good. Annie's income is $20 and peas cost $1 per can while eggplants cost $4 each. Draw a graph that shows the combinations of the two goods Annie can consume (put peas on the horizontal axis and label the axes and the intercepts). Given this constraint, Annie chooses to consume 8 cans of peas. Label her preferred bundle on the graph and be clear to show that this is optimal bundle. The price of eggplants falls to $2. Explain the effect on Annie's consumption of eggplants and peas. Draw a new graph with both budget constraints, the old and new indifference curves indicating her preferred bundles and explain any income and substitution effects.

Question #7: There are two goods in the world: eggplants and canned peas. Canned peas are an inferior good while eggplants are a normal good. Annie's income is $20 and peas cost $1 per can while eggplants cost $4 each. Draw a graph that shows the combinations of the two goods Annie can consume (put peas on the horizontal axis and label the axes and the intercepts). Given this constraint, Annie chooses to consume 8 cans of peas. Label her preferred bundle on the graph and be clear to show that this is optimal bundle. The price of eggplants falls to $2. Explain the effect on Annie's consumption of eggplants and peas. Draw a new graph with both budget constraints, the old and new indifference curves indicating her preferred bundles and explain any income and substitution effects.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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