Question

Scott consumes only two goods, steak and ale. When the price of steak falls, he buys more steak and more ale. On an optimal choice diagram (with budget lines and indifference curves), illustrate this pattern of consumption. Make sure you include all important labels and add any necessary comments to explain your graph.

Answer 1

As per the given information, we can deduce that steak and ale are complementary goods. This is because when price of ale decreases it leads to increase in demand for both goods.The consumer's optimal bundle moves from w to w'. This is illustrated in the figure below.