00:01
In this question it says that the price of tea increases.
00:05
So if the price of tea increases, then we're going to see a shift in consumption.
00:14
So they will now purchase more waffles because it is now cheaper.
00:24
So then we have the initial budget line and then after the price of tea increases we're going to have our budget line move like this.
00:33
So basically you see now there will be more waffles and less tea.
00:42
And then we are going to draw an indifference curve which is tangent to both of these.
00:52
So the indifference curve gives us the combination of goods for which she derives equal utility.
01:03
So it's going to be tangent to both budget lines.
01:06
The budget line before the price change and the budget line after the price change.
01:14
So because of the price change we have what is known as the substitution effect.
01:19
So basically what we're going to do is to show this.
01:22
We're going to draw a line from this point to this point...