4. A consumer is subject to the budget constraint shown by the solid line "Budget 1".
His initial utility-maximizing consumption bundle is denoted at Point A. Suppose the
price of Y decreases, causing the budget constraint to shift to the solid line "Budget 2",
and his utility-maximizing consumption bundle is now at Point C.
Y
Budget 2
B
Budget 1
A
C
U2
U1
X
a) Observationally, all we see if the shift from Point A to Point C. However, this shift
can be decomposed into two separate movements. What do economists call the shift
from Point A to Point B?
b) What do economists call the shift from Point B to Point C?
c) Based on the picture, what would the cross-price elasticity of demand, were we able
to calculate it. That is, are X and Y substitutes or complements?
