The initial budget constraint ($BC_1$) shows the Trimbles' budget constraint when the price of a fancy dinner is $25. At this price, Andrew and
would choose to consume eight dinners.
Suppose that the price of a fancy dinner increases to $50, shifting their budget constraint to $BC_2$, which represents a new relative price of t
breakfasts per dinner. (Hint: The blue line labeled H is parallel to $BC_2$ and tangent to $U_1$ at point S.)
In order to remain as happy as they were before the price increase—that is, to consume at some point on the same indifference curve as th
initially ($U_1$)—the Trimbles' income spent on dinners and breakfast would now have to be $
However, in reality, rather than mainta
original level of utility, the Trimbles choose the optimal bundle along their new budget constraint. At this point, they are
the price change in dinners.
off tha
Complete the following table by indicating which point movement represents the substitution effect and income effect for dinners when the
increases from $25 to $50. Then indicate whether each effect is positive or negative in this case.
Fancy Dinners
Substitution Effect
Income Effect
Consumption Change
Represented By... (Quantity of dinners) Positive or Negative
Because of the change to Andrew and Bet
this case, the price increase of dinners causes the Trimbles' real income to
come and the direction of the income effect, dinners are
for the Trimbles.
