4. Consider that an individual wants to allocate $1,000 between two goods, namely, DVDs and shirts....

4. Consider that an individual wants to allocate $1,000 between two goods, namely, DVDs and shirts. The price of DVDs are $20/DVD, and the price of shirts are $50/shirt.

(a) Suppose that the individual buys eight shirts. Show the combination of DVDs and shirts for this individual on their budget constraint. Illustrate this choice using the appropriate budget constraint.

(b) Explain how this individual makes the choice of buying this specific combination of DVDs and shirts.

(c) What would happen to the budget constraint if the price of shirts falls to $40/shirt? Illustrate the new budget constraint on the graph from part (a). What does the individual’s choices say about the ’Law of Demand?’

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Expert Solution

Rahul Sunny answered 1 year ago

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