Tim and Alyssa Espinosa live in Dallas and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, thepurple curves ₁ and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 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 thecorresponding indifference curve.DINER BREAKFASTS4840260II2BC₁5Slope: 4X-Intercept: 20Y-Intercept: 80IH10FANCY DINNERS The initial budget constraint (BC₁) shows the Espinosas' budget constraint when the price of a fancy dinner is $160. At this price, Tim and Alyssawould choose to consume two fancy dinners.Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC₂, which represents a new relative price of four dinerbreakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to BC₂ and tangent to ₁ at point Y.)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 were. However, in reality,on initially (7₁)-the Espinosas' income spent on fancy dinners and breakfast at diners would now only have to be srather than maintaining their original level of utility, the Espinosas 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 $160 to $40. Then indicate the consumption change that results from each effect.Fancy DinnersSubstitution EffectIncome EffectConsumption ChangeRepresented By... (Quantity of fancy dinners)In this case, the price decrease of fancy dinners causes the Espinosas's real income toincome and the direction of the income effect, fancy dinners are. Because of the change to Tim and Alyssa's realfor the Espinosas.

The purpose of this question is to show the indifference curve depicts the combination of two goods…

Tim and Alyssa Espinosa live in Dallas and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves ₁ and 12 represent two of their indifference curves' for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the corresponding indifference curve.

Tim and Alyssa Espinosa live in Dallas and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves ₁ and 12 represent two of their indifference curves' for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the corresponding indifference curve.

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

Tim and Alyssa Espinosa live in Dallas and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the
purple curves ₁ and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 per month available to
spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the
corresponding indifference curve.
DINER BREAKFASTS
48
40
26
0
I
I
2
BC₁
5
Slope: 4
X-Intercept: 20
Y-Intercept: 80
I
H
10
FANCY DINNERS

The initial budget constraint (BC₁) shows the Espinosas' budget constraint when the price of a fancy dinner is $160. At this price, Tim and Alyssa
would choose to consume two fancy dinners.
Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC₂, which represents a new relative price of four diner
breakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to BC₂ and tangent to ₁ at point Y.)
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 were
. However, in reality,
on initially (7₁)-the Espinosas' income spent on fancy dinners and breakfast at diners would now only have to be s
rather than maintaining their original level of utility, the Espinosas choose the optimal bundle along their new budget constraint. At this point, they are
off 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 decreases
from $160 to $40. Then indicate the consumption change that results from each effect.
Fancy Dinners
Substitution Effect
Income Effect
Consumption Change
Represented By... (Quantity of fancy dinners)
In this case, the price decrease of fancy dinners causes the Espinosas's real income to
income and the direction of the income effect, fancy dinners are
. Because of the change to Tim and Alyssa's real
for the Espinosas.

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