Question

1. Show, using a sketch graph, a consumer who prefers a cash gift rather than a larger gift of merchandise. [As a starting point use an optimal choice of a consumption bundle containing an amount of good X and a composite good Y.] 2. Show, using a sketch graph, income and substitution effects of a price decrease for an inferior good. Fully label your diagram.

Answer 1

In the grap consumer and a composite Good, y Ein 103 The he graph, let AB represent Whial budget line of the initio per and IG is the in indifference carne and 1 is the point of optimum unsumption. If the person is then a gift in the form of 1 herchandise then budget line AB fivot ton and Ts is the new indifference curne with point o as the new consumption bundle chere consumption of X has increased However, if the person is ginen cash ther gift, A men g erą shift higher to DE and more to consumer a righe point Eg where the is curne of optimum point ndifference of x and has y both consumption increased. where ca