Question

Jane commutes to work. She can either use public transport or her own car. Her indifference curves obey the four properties of indifference curves for ordinary goods 1. Draw Jane's budget line (BL,) with car travel on the vertical axis and public transport on the horizontal axis 2. Suppose that Jane consumes some of both goods. Explain how her optimal consumption bundle can be obtained. Then, draw an indifference curve that helps you illustrate that optimal consumption bundle represented by point A. 3. Now, the price of public transport increases. Draw Jane's new budget line (BL.) along with her first budget line (BL) For Jane, public transport is an inferior, but not a Giffen (the use of her own car is assumed to be a normal good). Is Jane consuming more or less public transport? Show the income and substitution effects from this fall in the price of public transport. Display all theoretical details Use appropriate diagrams with point B denoting the bundle consumed when only the substitution effect is acting. Tell us whether there is an increase or decrease in the consumption of the two goods under each effect. Which effects are dominating? 4. 5. 6. Now, Jane's income falls. Draw her new (BL,) and previous (BL.) budget lines on the same diagram. Draw an indifference curve that illustrates her new optimal consumption bundle (denoted by point D). Which effects) is (are) acting here?

Answer 1

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Q5)

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From E to F : substitution effect

From F to G : income effect

point F is point B when only substitution effect is acting.

size of substitution effect is larger, so substitution effect is dominating.

under substitution effect, Consumption of public good falls, & consumption of car rise.

under income effect, public good Consumption rise.

Car Consumption falls