Question

Part 3 of 3 - Potato Chips and Coke Use the following diagram for the next TWO questions. The diagram shows the indifference curves and a few possble budget constraints for a consumer. Assume this consumer follows the economic model for making optimal purchasing choices Oy

Answer 1

a) We can see that as the consumer moves from point A to point C, the quantity demanded of potato chips has increased and the budget line of the consumer also pivots increasing the quantity demanded of potato chips. According to law of demand, quantity demanded increases when there is a fall in the price of the commodity.

So, the change in the situation is the fall in the price of chips.

It is also observed that due to fall in the price of chips, quantity demanded of chips has increased while the quantity demanded of coke has decreased. This means that there is direct or positive relationship between price of chips and quantity demanded of coke. So, these two goods are substitutes.

b) As the consumer moves from point A to point B, the quantity demanded of coke decreases. According to law of demand, quantity demanded decreases if there is increase in the price of the commodity.

So, this means that this change could be due to rise in the price of diet coke.

We can see that point B lies on a new pivoted budget line. So, the rise in price of diet coke may be combined with rise in the consumer's income.