Question

Share an Example from your own life of a time when you faced a preference tradeoff and a cost (budget) tradeoff in order to make a decision. If one of the options had become significantly cheaper, how would it have altered your decision? What if you had had a significant increase in income?

Answer 1

Say I am very fond of outdoor games and want to purchase badminton Shuttle and Cricket Ball.

For simplicity assume shuttle pack cost is $600 and cricket ball pack cost is $600 where pack consists of 6pieces

Also assume your income is 1000, then say you purchase 5,5 piece of both shuttle and Ball.

When say Shuttle price decreases which makes shuttles cheaper and income and aubstitution effect both will make consumption of shuttle to increase. Thus more shuttle can be purchased. For eg say shuttle price decreases to 500 for 6 pieces then consumer will purchase 6shuttles and 5Ball.

When income increase, both shuttle and Ball demand increases because both goods are normal goods and thus demand of both goods increases.