#Let’s say John allocates his income amounting to $240 between sushi and canned tuna. Let unit price of sushi be $20 and unit price of canned tuna be $12.Draw the budget line.Now suppose price of canned tuna decreases to $6. Draw the new budget line.Draw two indifference curves. The first should be tangent to the old budget line and the second should be tangent to the new budget line (tangency points represent the two points of consumption for John where utility is maximized before and after the price change) such that canned tuna is an inferior but not a Giffen good. In the figure, show the income, substitution and total effects.

The utility is maximized where the slope of indifference curve is equal to the slope of budget line.…

Answered: et line. Now suppose price of canned…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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#Let’s say John allocates his income amounting to $240 between sushi and canned tuna. Let unit price of sushi be $20 and unit price of canned tuna be $12.

Draw the budget line.
Now suppose price of canned tuna decreases to $6. Draw the new budget line.
Draw two indifference curves. The first should be tangent to the old budget line and the second should be tangent to the new budget line (tangency points represent the two points of consumption for John where utility is maximized before and after the price change) such that canned tuna is an inferior but not a Giffen good. In the figure, show the income, substitution and total effects.

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