1) A) Use a budget line and indifference curve to show an initial optimal consumption bundle...

1) A) Use a budget line and indifference curve to show an initial optimal consumption bundle of onions
and peppers. Assume onions are normal goods and peppers are inferior goods. Next suppose the price
of peppers decreases. Graphically illustrate and explain the income and substitution effects.

B) Using the two prices and two quantities of peppers from the previous part of this problem, construct
a demand curve. Explain where your numbers are coming from. Also show the income and substitution
effect on your graph.

**** PLEASE WRITE CLEARLY, THANK YOU

Expert Solution

Rahul Sunny answered 1 year ago

A utility maximizer will always choose a bundle at which his indifference curve is tangent to his budget line.

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