Revist the example from question 3a. Recreate this graph, and add the following 2 things to your graph: 1) a compensated budget constraint and 2) a third indifference curve that captures the optimal choice on that compensated budget constraint curve. Label 3 points: 1) the original optimal choice, 2) the optimal choice after the price change, and 3) the optimal choice on the compensated budget constraint. Use this new graph to answer the following questions. (a) Graphically, what is the substitution effect? (b) Graphically, what is the income effect?
Revist the example from question 3a. Recreate this graph, and add the following 2 things to your graph: 1) a compensated budget constraint and 2) a third indifference curve that captures the optimal choice on that compensated budget constraint curve. Label 3 points: 1) the original optimal choice, 2) the optimal choice after the price change, and 3) the optimal choice on the compensated budget constraint. Use this new graph to answer the following questions. (a) Graphically, what is the substitution effect? (b) Graphically, what is the income effect?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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