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Homework 3 Chapter 5: Demand 1. What happens to the amount of x and y consumed when income falls if x and y are normal goods? Draw a budget constraint (before the income decrease) and a convex utility curve that corresponds to the optimal consumption bundle. Draw a new budget constraint (after income falls) and a new convex utility curve that corresponds to the optimal consumption bundle. Has the amount of x and y consumed increased or decreased due to the fall in income? Label all axes points, budget constraints, and indifference curves. 2. What happens to the amount of x and y consumed when income falls if x is a normal good and y is an inferior good? Draw a budget constraint (before the income decrease) and a convex utility curve that corresponds to the optimal consumption bundle. Draw a new budget constraint (after income falls) and a new convex utility curve that corresponds to the optimal consumption bundle. Has the amount of x and y consumed increased or decreased due to the fall in income? Label all axes, points, budget constraints, and indifference curves.

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