As the lockdown period ends, you decided to visit the new local coffee shop and spend...

As the lockdown period ends, you decided to visit the new local coffee shop and spend no more than $15 for your breakfast. You equally like to have ‘pancakes with maple syrup and a cup of coffee’ and ‘raisin toast with salmon and a cup of coffee’. The price of the pancake-coffee combination was $10, while that of raisin toast-coffee was $12. Find out the optimum amount of goods you consumed. As you enjoyed the food of this new place, you wanted breakfast once again there the following day. To your surprise, you noted that raisin toast-coffee was available at a discounted price of $9, while the price of pancake-coffee did not change. Find out your optimal consumption in this changed situation. Explain the income and substitution effects of this price change using a diagram.

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Rahul Sunny answered 1 year ago

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