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Chapter 1: Economic Models III (10 points) Suppose the price for Compact disks (CDs) is $15 each. Suppose the price for downloading tracks of music legally is S1 for each song. Suppose T. Hussain has $30 to spend each month on music. Draw the budget constraint on the graph paper provided with CDs on the horizontal axis. Suppose the price of CDs falls to $10. Draw the new budget line. Show using indifference curves the beginning and ending utility maximizing choices and the substitution and income effect given that CDs are inferior but not Giffen goods. Label the substitution and income effects on the graph.
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LDoconlading eqaliy a lle 30. 15 when R:10 IC2 Rep P. E where s.e Sobstiuhion effeci T.E Income effect P.E Pace Effect when a poice of a qood changes then thete ave two types of efects i)The rate at which we can exchange One f8 another changest) Purchacing oges of income chorger. The change is demand due to change in nate of exchange s called substitution effect. while change ic demard due to change in parchasi Power is colled e when paice changec then there coill be poice movement ard we can break thic paice moverneai rto too Steps n the frct step, we allow velative paices to change and adjud money income soexto hold puchasng power constart In e decord dtep, we alou pune hosng toues b adjusi tohile holding oclative poicer conslant The bedt way fo explain the price moement i to pivot budgel tine aac und Dsiinaly demand e bundle ard then shift piuotad budgél line to netw demanded tundle. &y dong this wa sepont

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