Susan buys bagels and falafels. The price of a falafels is £1 and the price of a bagels is £3. Susan has £12 to spend on bagels and falafels. a) Draw Susan's budget constraint and a possible indifference curve. Explain the assumptions behind the shape of the indifference curve you have drawn. b)If the price of falafels falls to £0.80 each, how will this affect her purchases? Answer in words and graphically, clearly indicating income and substitution effects of the price change. c) If Susan only enjoys bagels and falafels when she has 2 falafels for every bagel that she eats, draw her indifference curves. How many bagels and falafels should she buy to maximise her utility? Assume Susan has £12, one falafel costs £0.80 and bagels costs £3 each.

Susan buys bagels and falafels. The price of a falafels is £1 and the price of a bagels is £3. Susan has £12 to spend on bagels and falafels. a) Draw Susan's budget constraint and a possible indifference curve. Explain the assumptions behind the shape of the indifference curve you have drawn. b)If the price of falafels falls to £0.80 each, how will this affect her purchases? Answer in words and graphically, clearly indicating income and substitution effects of the price change. c) If Susan only enjoys bagels and falafels when she has 2 falafels for every bagel that she eats, draw her indifference curves. How many bagels and falafels should she buy to maximise her utility? Assume Susan has £12, one falafel costs £0.80 and bagels costs £3 each.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Revealed Preferences and Budget Constraint Analysis

Revealed means “Let Out,” and Preference means “Choice”; Choice Reveals Preference.

Question

Susan buys bagels and falafels. The price of a falafels is £1 and the price of a bagels is £3. Susan has £12
to spend on bagels and falafels.
a) Draw Susan's budget constraint and a possible indifference curve. Explain the assumptions behind the
shape of the indifference curve you have drawn.
b)If the price of falafels falls to £0.80 each, how will this affect her purchases? Answer in words and
graphically, clearly indicating income and substitution effects of the price change.
c) If Susan only enjoys bagels and falafels when she has 2 falafels for every bagel that she eats, draw her
indifference curves. How many bagels and falafels should she buy to maximise her utility? Assume Susan
has £12, one falafel costs £0.80 and bagels costs £3 each.
d) Susan's friend Declan grows 100 potatoes each year and all of his income comes from selling them. He
spends all of his income each year consuming potatoes and other goods. For Declan, potatoes are a Giffen
good, in that for a given income his consumption of potatoes will rise when their price rises. The price of
potatoes falls and he consumes more potatoes. Taking into account the fact that his income actually comes
from selling potatoes, explain how the last statement can be consistent with those that precede it.

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