Suppose it is possible to buy left shoes for a price of $35/shoe
and right shoes for a price of $45/shoe. Alex has an annual budget
of $1600 for buying shoes, and she has, like most people two
feet.
- Draw Alex’s budget line between left shoes (on the horizontal
axis) and right shoes (on the vertical axis). Draw a few of her
indifference curves, and show her optimal choice. How many left
shoes and how many right shoes does she buy?
- Now suppose the price of right shoes increases to $65/shoe.
Draw (on the same diagram you used to answer question 8!)
her new budget line. What is her optimal choice? How many left
shoes and how many right shoes will she buy?
- Show (on the same diagram you used to answer question
8 and 9!) the income effect and the substitution effect caused by
the fall in the price of right shoes on her consumption of
left shoes.
- True or False. Left shoes are an inferior good
for Alex.