The initial budget constraint (BC₁) shows the Steins' budget constraint when the price of a fancy dinner is $100. At this price, Larry and Megan wouldchoose to consume five fancy dinners.Suppose that the price of a fancy dinner decreases to $50, shifting their budget constraint to BC₂, which represents a new relative price of five dinerbreakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to BC₂ and tangent to I₁ at point S.)In order to remain as happy as they were before the price decrease-that is, to consume at some point on the same indifference curve as they wereon initially (1₁)-the Steins' income spent on fancy dinners and breakfast at diners would now only have to be $ . However, in reality, ratherthan maintaining their original level of utility, the Steins choose the optimal bundle along their new budget constraint. At this point, they areoff than before the price change in fancy dinners.On the following table, indicate which point movement represents the substitution effect and income effect for fancy dinners when the price decreasesfrom $100 to $50. Then indicate the consumption change that results from each effect.Fancy DinnersSubstitution EffectIncome EffectRepresented By...Consumption Change(Quantity of fancy dinners)In this case, the price decrease of fancy dinners causes the Steins's real income toincome and the direction of the income effect, fancy dinners are. Because of the change to Larry and Megan's realfor the Steins. 9. Income and substitution effectsLarry and Megan Stein live in Detroit and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, thepurple curves I₁ and I2 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $1,000 per month available tospend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and thecorrespondingindifferencecurve.DINER BREAKFASTS208300I01III156SBC,8FANCY DINNERSHBC₂?

The indifference curve depicts the combination of two goods that generate the same level of utility…

Answered: The initial budget constraint (BC₁)…

The initial budget constraint (BC₁) shows the Steins' budget constraint when the price of a fancy dinner is $100. At this price, Larry and Megan would choose to consume five fancy dinners.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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