Question

Suppose it is possible to buy left shoes for a price of \$35/shoe and right shoes...

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.

1. 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?
2. 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?
3. 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.
4. True or False. Left shoes are an inferior good for Alex.

SOLUTION:-

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