Question

9. Income and substitution effects Dmitri and Frances Doherty live in Miami and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves 11 and 12 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. Z TO DINER BREAKFASTS so 5 BC, H BC 56 8 FANCY DINNERS

Answer 1

$700; better;
(New income = value of bundle at Y = (50*8) + (10*30) = 400 + 300 = 700)

	Represented by	Consumption change
SE	Movement from X to Y	8-5 = 3
IE	Movement from Y to Z	6 - 8 = -2

increase; inferior good
(As price decrease, real income increases but quantity decreases which means that it is inferior.)