Drop down options 1st drop down options-A. BetterB. Worse ColumnsRepresented By drop down optionsA. A to BB. A to CC. B to C Consumption Change drop down optionsA. 1 fewerB. 1 moreC. 2 fewerD. 2 more In this case, the price increases of upscale dinners causes the real income of two friends to decrease or increase. Because of the change to Antonio and Caroline's real income and the direction of the income effect, upscale dinners are a normal good or an inferior good for the friends. 9. Income and substitution effectsAntonio and Caroline are two friends living in Denver who love to try different restaurants in their city, but have specific preferences regarding venuesfor certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curvesI₁ and I₂ represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $500available to spend on going out to eat, and further, that the price of a diner brunch is always $5. Each labeled point represents tangency between abudget constraint and the corresponding indifference curve.DINER BRUNCHES0ACIIIIINIM11LIN| | |BC,7 8UPSCALE DINNERSHBC? The initial budget constraint (BC₁) shows the two friends' budget constraint when the price of an upscale dinner is $25. At this price, Antonio andCaroline would choose to consume eight upscale dinners.Suppose that the price of an upscale dinner increases to $50, shifting their budget constraint to BC2, which represents a new relative price of tendiner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC and tangent to ₁ at point B.)To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve asthey were on initially (11)-the income spent on upscale dinners and brunch at diners would now have to be S. However, in reality, rather thanmaintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they areoff than before the price change in upscale dinners.On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the priceincreases from $25 to $50. Then indicate the consumption change that results from each effect.Upscale DinnersSubstitution EffectIncome EffectConsumption ChangeRepresented By... (Quantity of upscale dinners)In this case, the price increase of upscale dinners causes the real income of the two friends toCaroline's real income and the direction of the income effect, upscale dinners areBecause of the change to Antonio andfor the friends.

Question

Drop down options 1st drop down options-A. BetterB. Worse ColumnsRepresented By drop down optionsA. A to BB. A to CC. B to C Consumption Change drop down optionsA. 1 fewerB. 1 moreC. 2 fewerD. 2 more In this case, the price increases of upscale dinners causes the real income of two friends to decrease or increase. Because of the change to Antonio and Caroline's real income and the direction of the income effect, upscale dinners are a normal good or an inferior good for the friends. 9. Income and substitution effectsAntonio and Caroline are two friends living in Denver who love to try different restaurants in their city, but have specific preferences regarding venuesfor certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curvesI₁ and I₂ represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $500available to spend on going out to eat, and further, that the price of a diner brunch is always $5. Each labeled point represents tangency between abudget constraint and the corresponding indifference curve.DINER BRUNCHES0ACIIIIINIM11LIN| | |BC,7 8UPSCALE DINNERSHBC? The initial budget constraint (BC₁) shows the two friends' budget constraint when the price of an upscale dinner is $25. At this price, Antonio andCaroline would choose to consume eight upscale dinners.Suppose that the price of an upscale dinner increases to $50, shifting their budget constraint to BC2, which represents a new relative price of tendiner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC and tangent to ₁ at point B.)To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve asthey were on initially (11)-the income spent on upscale dinners and brunch at diners would now have to be S. However, in reality, rather thanmaintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they areoff than before the price change in upscale dinners.On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the priceincreases from $25 to $50. Then indicate the consumption change that results from each effect.Upscale DinnersSubstitution EffectIncome EffectConsumption ChangeRepresented By... (Quantity of upscale dinners)In this case, the price increase of upscale dinners causes the real income of the two friends toCaroline's real income and the direction of the income effect, upscale dinners areBecause of the change to Antonio andfor the friends.

Accepted Answer

SE and IE are two components of the effect of the price change. SE reflects the change in quantity…