Question

Homework (Ch 21) 9. Income and substitution effects Andrew and Beth Trimble live in Philadelphia and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves I, and I, represent two of their indifference curves for fancy dinners and diner breakfasts. They have $1,000 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the corresponding indifference curve. ed N ed DINER BREAKFASTS M 30 0 OG H BC, 56 Н FANCY DINNERS

Answer 1

700; better
(New income = Value of the bundle at M = (50*8) + (10*30) = 400 + 300 = 700. As new bundle lies above initial IC, so, they are better off.)

SE:
Represented by: Movement from L to M
Consumption change = 8 - 5 = 3

IE:
Represented by: Movement from M to N
Consumption change = 6 - 8 = -2

increase; inferior good
(Decrease in income increases the puchasing power but as IE is negative so the good is inferior.)