A student living in a university hostel has two options for meals: eating at the dining hall for Rs.600 per meal, or eating a meal at Dhaaba for Rs.150 per meal. His weekly food budget is Rs.6000. Draw the budget constraint showing the trade-off between dining-hall meals and meals at Dhaaba. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A. Suppose the price of a Dhaaba meal now rises to Rs.200. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining-hall meals. Label the new optimum as point B. What happened to the quantity of meals at Dhaaba consumed as a result of this price change? What does this result say about the income and substitution effects? Explain. Use points A and B to draw a demand curve for meals at Dhaaba. What is this type of good called?
A student living in a university hostel has two options for meals: eating at the dining hall for Rs.600 per meal, or eating a meal at Dhaaba for Rs.150 per meal. His weekly food budget is Rs.6000.
Draw the budget constraint showing the trade-off between dining-hall meals and meals at Dhaaba. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A.
Suppose the price of a Dhaaba meal now rises to Rs.200. Using your diagram from part (a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining-hall meals. Label the new optimum as point B.
What happened to the quantity of meals at Dhaaba consumed as a result of this price change? What does this result say about the income and substitution effects? Explain.
Use points A and B to draw a demand curve for meals at Dhaaba. What is this type of good called?
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