Question

Speaking: Raed Saeed (Host) Pizza B1 QN 1. John has an income of 800 dollars per week, which he can split between consumption of pizza and coke (Figure 1). The price of pizza is currently $10, while coke costs $8. At these prices, he divides his income between the two goods such that his optimal consumption point is at point K (with 45 coke) shown on original budget line Bo. Suppose that the price of pizza decreases to $8, so that the new budget line is B1. John's optimal point now becomes point M(with 50 coke). Figure 1 XBO IC1 ICO - Cok 45 50 X5

Answer 1

1) a) budget constraint ,

M=10P+8C

Given at initial equilibrium,C=45

800=10P+8*45=10p+360

P=440/10=44

At initial equilibrium,P=44

New budget constraint,

800=8(P+C)

100=P+C

Given at new equilibrium,C=50

P=100-50=50

B)To shows Income and substitution effect, we need make a new budget ( compensated line), which has slope exactly same as new budget line but it's tangent with initial Indifference curve.

zlompensated budgetline 141 pizza Ito 4550 Toke

Point K to L is substitution effect and from Point L and M is Income effect.

From point L to M ,the consumption of pizza is Increased ,so pizza has a positive relation with Income,so pizza is a normal good.

C)

- Demand я рія Prices 1. 2. 3. 4. 6. 64.hh, Pu