To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as they were on initially (1₁)-the income spent on upscale dinners and brunch at diners would now have to be 5 However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off 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 price increases from $25 to $50. Then indicate the consumption change that results from each effect. Upscale Dinners Substitution Effect Income Effect Consumption Change Represented By... (Quantity of upscale dinners) In this case, the price increase of upscale dinners causes the real income of the two friends to Caroline's real income and the direction of the income effect, upscale dinners are Because of the change to Antonio and for the friends.
To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as they were on initially (1₁)-the income spent on upscale dinners and brunch at diners would now have to be 5 However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off 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 price increases from $25 to $50. Then indicate the consumption change that results from each effect. Upscale Dinners Substitution Effect Income Effect Consumption Change Represented By... (Quantity of upscale dinners) In this case, the price increase of upscale dinners causes the real income of the two friends to Caroline's real income and the direction of the income effect, upscale dinners are Because of the change to Antonio and for the friends.
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter6: Consumer Choice And Demand
Section: Chapter Questions
Problem 6QFR
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Transcribed Image Text:Antonio and Caroline are two friends living in Dallas who love to try different restaurants in their city, but have specific preferences regarding venues
for certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves
I and I₂ represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $500
available 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 a
budget constraint and the corresponding indifference curve.
DINER BRUNCHES
0
I
8,60
LIN
III
5
BC₂
78
UPSCALE DINNERS
H
BC
Transcribed Image Text:The initial budget constraint (BC₁) shows the two friends' budget constraint when the price of an upscale dinner is $25. At this price, Antonio and
Caroline 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 ten
diner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC₂ and tangent to I, at point Y.)
To maintain the level of happiness they experienced before the price increase-that is, to consume at a point along the same indifference curve as
they were on initially (1₁)-the income spent on upscale dinners and brunch at diners would now have to be $ However, in reality, rather
than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are
off 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 price
increases from $25 to $50. Then indicate the consumption change that results from each effect.
Upscale Dinners
Substitution Effect
Income Effect
Consumption Change
Represented By... (Quantity of upscale dinners)
In this case, the price increase of upscale dinners causes the real income of the two friends to
Caroline's real income and the direction of the income effect, upscale dinners are
Because of the change to Antonio and
for the friends.
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