Suppose that when your income is $45, the price of ice cream cones is $1.50, and the price of churros is $3, you buy 12 ice cream cones and spend the rest of your income on churros. Further, assume that when the price of ice cream increases to $2.50, you re-optimize and now buy 6 ice cream cones. Graphically illustrate this change and both the income and substitution effects.

Suppose that when your income is $45, the price of ice cream cones is $1.50, and the price of churros is $3, you buy 12 ice cream cones and spend the rest of your income on churros. Further, assume that when the price of ice cream increases to $2.50, you re-optimize and now buy 6 ice cream cones. Graphically illustrate this change and both the income and substitution effects.

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter21: The Theory Of Consumer Choice

Section: Chapter Questions

Problem 1PA

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