Question

8. Normal and inferior goods Alyssa enjoys going to the theater to see plays, and she also enjoys going to rock concerts. The following diagram shows two of Alyssa's indifference curves for going to plays and concerts. With Alyssa's initial budget constraint (BC), she chose to go to two concerts and six plays per month (point x). Then her budget constraint shifted to BC2, and she chose to go to five concerts and five plays per month (point Y). PLAYS BC BCA 02 5 B 10 CONCERTS Of the following choices, which could have shifted Alyssa's budget constraint from BC to BC2? Check all that apply. The prices of both theater and concert tickets increased while her income stayed the same. Her income increased while the prices of theater and concert tickets stayed the same. The price of concert tickets increased while her income and the price of theater tickets stayed the same. The prices of both theater and concert tickets decreased while her income stayed the same. goods and concerts are Based on Alyssa's consumption of plays and concerts after her budget constraint shifted, plays are goods.

Answer 1

8. The correct option would be

• Her income increased while the prices of theater and concert tickets stayed the same.
• The price of both theater and concert tickets decreased while her income stayed the same.

The budget constraint is expressed as , and the shift in the budget constraint from BC1 to BC2 would be because because either income increased (in which case the budget line shifts right parallel to what it was before), or the price decreased by the same rate, ie for 0<a<1, the price becomes as or , and since , the shift in budget line is same as increase in income than before.

Play's consumption decreases after increase in income or decrease in play's prices, meaning that plays are inferior/giffen goods (giffen goods are special case of inferior goods). Concert's consumption increases after increase in income or decrease in concert prices, meaning that concerts are normal goods.