c. For Sarah, is coffee a normal or inferior good? On the following separate diagram, decompose the substitution effect and the income effect on coffee consumption. Donuts 10- 8 987 9. 7- 6. 5 4. 3 2- 1- 1 2 3 4 5 6 7 8 9 10 Coffee Sarah allocates her income of $5.00 between the consumption of donuts (D) and coffee (C). The price of donuts is $ 0.50 each. Initially, the price of coffee is $1.00 per cup. Subsequently, the price of coffee falls to $0.50 per cup. a. Write the budget constraints in both cases. b. Her tastes and preferences are indicated by the indifference curves shown in the following figure. In the graph, draw the two budget constraints and show the initial utilitymaximizing position and the new utility - maximizing position. (Hint: draw the budget lines and find the tangent points.) c. For Sarah, is coffee a normal or inferior good? On the following separate diagram, decompose the substitution effect and the income effect on coffee consumption.
c. For Sarah, is coffee a normal or inferior good? On the following separate diagram, decompose the substitution effect and the income effect on coffee consumption. Donuts 10- 8 987 9. 7- 6. 5 4. 3 2- 1- 1 2 3 4 5 6 7 8 9 10 Coffee Sarah allocates her income of $5.00 between the consumption of donuts (D) and coffee (C). The price of donuts is $ 0.50 each. Initially, the price of coffee is $1.00 per cup. Subsequently, the price of coffee falls to $0.50 per cup. a. Write the budget constraints in both cases. b. Her tastes and preferences are indicated by the indifference curves shown in the following figure. In the graph, draw the two budget constraints and show the initial utilitymaximizing position and the new utility - maximizing position. (Hint: draw the budget lines and find the tangent points.) c. For Sarah, is coffee a normal or inferior good? On the following separate diagram, decompose the substitution effect and the income effect on coffee consumption.
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 1PA
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Transcribed Image Text:c. For Sarah, is coffee a normal or inferior good? On the following separate diagram,
decompose the substitution effect and the income effect on coffee consumption.
Donuts
10-
8
987
9.
7-
6.
5
4.
3
2-
1-
1 2 3 4 5 6 7 8 9 10 Coffee
Transcribed Image Text:Sarah allocates her income of $5.00 between the consumption of donuts (D) and coffee (C). The price of donuts is $
0.50 each. Initially, the price of coffee is $1.00 per cup. Subsequently, the price of coffee falls to $0.50 per cup.
a. Write the budget constraints in both cases.
b. Her tastes and preferences are indicated by the indifference curves shown in the following figure. In the graph,
draw the two budget constraints and show the initial utilitymaximizing position and the new utility - maximizing
position. (Hint: draw the budget lines and find the tangent points.)
c. For Sarah, is coffee a normal or inferior good? On the following separate diagram, decompose the substitution
effect and the income effect on coffee consumption.
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