Question

1. Problems 22-1 A college student has two options for meals: eating at the dining hall for $5 per meal, or eating a package of Cup O' Soup for $2.50 per meal. Her weekly food budget is $100. Assume that she spends equal amounts on both goods. On the following graph, use the green line (triangle symbol) to draw the college student's budget constraint. Then use the black point (plus symbol) to indicate the initial optimum in this case. Initial Budget Constraint Initial Optimum (A) Packages of Cup O' Soup HAHAHA+ New Budget Constraint New Optimum (B)

Answer 1

42 problems 22-1 A college student has two options for meals, eating at the dining hall for $5 pu mear - iie Pm= $5 /meal ad eating a pachage of cup o soup costs - $2.50 /meal ie pe = $2,50 / meal, Her weakly budget is $100. le = $100 - Hace the budget equation will be ?. I = .Mpm t e pe 2150 € =) 100 = 5M+ 2.50 € I Now, the horizontal in Incept of the budget line will be r substituting e-o in the budget equation) 100.= 5m +(2150x0) =) 100 = 5M =) M2 20 and untical in tucept of the budget line will be [ substituting m=0 in the budget equation? 10015x0) + 2.50 . I =) = 40 Now by Joining horizontal and untical in tucebt, we can get her budget constaint JK Now, and she spends equal anomts on both goods. NonCamScanner

Spu she - prces to = $50 on dining hall meals 100 = $50 on Package cup o' soup. initial Optimal ainont of meals at dining Huce initial Optimal => 5M = 50 and initial oph - hall s 5M = 50 -) MP 10 initial opthal amout of cup o soup will be in 2,50 = 50 2) ca 20 the indifference coue will be targent to initial Andact line. JK aon at initial of timen bundle . Hence the indid (10,20). [com, c) = d with CamScanner

tu r 40 f & a pachages of cup o soup 10 14 20 Meals at Dining Hall Now, suppose Pule of Cup o soup now fall sto $2 Hence now the budget constraint equation will ber 100= 5mt ze . horizontal in Ancept of the budget lire remain unchange at 20 but the untial anticept of the budget line will be: Now the horizontal interces CamScanner

[substitute 100= (5x0) +2C =) C250 ince the budget live will istate NDO, income ie il to & hall meals th o * 10) = $30 on . Hence now the optimal bt - outhod from Jk to #.LK the student now spinds 70% of her 170 to * 100) = $ 70 on dining a meals this the student will now spul 30% or 1o) $30 on cup o' soup. you the optimal amount of clining hall meas will 5м : 70 => ma 14 and optimal an out of cup o soup will be 26= 30 =) Cals the Now the new indifthence caue Ila will be Aangent to *Lk at optinal point (m, c) = (14,15). Now as pure of Cup of o soup balls from $2.50 to - $2 the consumption of Cup o soup falls from - 2 0 to is nits. Usually due to fall in puce, consmpton 7 increasis for normal goods. Here as pure falls, in will substitute meals at Dining Hall with combi Hunce substituton effect is always atve. Now for normal goods as ou puchasing pown increase and consuen by se more of that good. Hue as pure of Cup o soub fallanned consinen's real income over and consme $2 the conts. Usually due to as puce falls increa will sub Hance Honce aods puce as fall, Sormal goods o oup. cup por negative. Pu Chasing increase Consnis cialisonscanner

buys less of cupo soup. Hunce here due to substitution effect, consmption of eup 'o soup should increase, and due to in come effect as : cup o soup is an intuin good, consmption of cup o soup falls Hue as final consumpton of cup o soup sie 15 is less than the inital consmption of cupo soup iic 2o . Huce here encome effect outweigus the Substitution effect or in come effect is greatu than the substitution effect. Thus, . As a result of this price changes the quantity of Cup'o' soup packages consumed falls This meas that cup o' soup Must be. Interior greath them the substitution eftet. Now we can draw the demand (uive for. Cup o' soup. At pule $2.5083 quantity of Cup o soup : At consmed 2o, price of $2, quantity of cup o soup consumed is 15. Ince we can draw effect and the income - good - cave. theca de mad 7 CamScanner

2.50+ mand Care - 15 20 .Q . Hre we get upward sloping demand cauc. je at lown prices, quantity demanded declines Hace cup o' soup is a grüstun good Hence the answn will be False Scanned with CamScanner