Chapter 19.A, Problem 2P

To determine

Concept Introduction:

Budget Line: This is defined as the combination of all the goods that a consumer can buy exhausting his whole income. The formula to calculate the budget line is:

Where,

• is the quantity of good X.
  
• is the quantity of good Y.
  
• is the total income.
  
• is the price of good X.
  
• is the price of good Y.
  

Indifference Curve: The graph that shows the goods that provide the same satisfaction level is known as an indifference curve. They are a downward sloping curve and convex to the origin. Two indifference curve lines never intersect each other.

Substitution effects: It states that the demand of a good increases if the price of a substitute good increases and vice versa. Take an example of tea and coffee, tea and coffee are substitute goods. Hence, if the price of tea increases, then the demand for coffee increases.

Income effects: It states that the demand for normal goods and the income are directly related which means that when income increases, then the demand for normal goods also increases and vice versa.