Assume X and Y are economic goods. Plot X on the x axis and Y on the y axis using graph paper. Assume income is $50 and the price of X is $2.50 and the price of Y is $5.00. Draw the original budget line and show a utility maximizing interior equilibrium using an indifference curve.
a. Draw a new budget line if the price of X falls to $2.00. Show using indifference curves the substitution and income effects if both goods are normal.
b. Draw a new budget line if the price of X falls to $2.00. Show using indifference curves the substitution and income effects if X is inferior but not a Given good.
c. Draw a new budget line if the price of X falls to $2.00. Show using indifference curves the substitution and income effects if X is inferior and a Given good.
