7. A college student has two options for meals: eatingat the dining hall for $6 per meal, or eating a Cup O’Soup for $1.50 per meal. Her weekly food budget is $60.a. Draw the budget constraint showing the trade-offbetween dining-hall meals and Cups O’ Soup.Assuming that she spends equal amounts on bothgoods, draw an indifference curve showing theoptimum choice. Label the optimum as point A.b. Suppose the price of a Cup O’ Soup now rises to$2. Using your diagram from part (a), show theconsequences of this change in price. Assumethat our student now spends only 30 percent ofher income on dining-hall meals. Label the newoptimum as point B.c. What happened to the quantity of Cups O’Soup consumed as a result of this price change?What does this result say about the income andsubstitution effects? Explain.d. Use points A and B to draw a demand curve forCup O’ Soup. What is this type of good called?
7. A college student has two options for meals: eating
at the dining hall for $6 per meal, or eating a Cup O’
Soup for $1.50 per meal. Her weekly food budget is $60.
a. Draw the budget constraint showing the trade-off
between dining-hall meals and Cups O’ Soup.
Assuming that she spends equal amounts on both
goods, draw an indifference curve showing the
optimum choice. Label the optimum as point A.
b. Suppose the
$2. Using your diagram from part (a), show the
consequences of this change in price. Assume
that our student now spends only 30 percent of
her income on dining-hall meals. Label the new
optimum as point B.
c. What happened to the quantity of Cups O’
Soup consumed as a result of this price change?
What does this result say about the income and
substitution effects? Explain.
d. Use points A and B to draw a demand curve for
Cup O’ Soup. What is this type of good called?
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