Principles of Economics, 7th Edition

Published by South-Western College
ISBN 10: 128516587X
ISBN 13: 978-1-28516-587-5

Chapter 21 - Part VII - The Theory of Consumer Choice - Problems and Applications - Page 458: 1

Answer

a) Please see the first graph. b) Please see the second graph. c) Please see the third graph.

Work Step by Step

a) The first graph shows the original budget constraint curves ($BC_{1}$ and $BC_{2}$) as well as the indifference curves ($I_{1}$ and $I_{2}$). The frost decreases the number of coffee beans and increases the price of the coffee beans (and thus the price of coffee). This increase shifts the budget constraint curve from $BC_{1}$ to $BC_{2}$. b) The second graph shows the original budget constraint curves ($BC_{1}$ and $BC_{2}$) as well as the indifference curves ($I_{1}$ and $I_{2}$). Under the substitution effect, Jennifer would substitute away from coffee and consume more croissants. c) The third graph shows the original budget constraint curves ($BC_{1}$ and $BC_{2}$) as well as the indifference curves ($I_{1}$ and $I_{2}$). Under the income effect, Jennifer is made worse off with the increase in the cost of coffee. Her budget constraint curve shrinks, and she is, in effect, poorer than before. Thus, both coffee and croissants will be purchased in lower quantities.
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