Question

Assume that a person consumes two goods, Coke and Snickers. Use a graph to demonstrate how the consumer adjusts his/her optimal consumption bundle when the price of Coke decreases. Carefully label all curves and axes. What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good?

Answer 1

The consumption of coke would would increase if coke is a normal good. The consumption of Coke will fall if the income effect is dominant but would increase if substitution effect dominates even if the good is inferior

In the graph the budget constrait line is given by

$P_{s}x + P_{c}y < m$

where m is the income

the budget line's u intercept is $m/p_{c}$

and the x intercept is $m/p_{s}$

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