Question

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.

Answer #1

**SOLUTION:-**

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