Question

6.         As a student, David’s lunch has always been bagel and cream cheese. He rarely could afford           to buy a decent meal. Now that he graduated and got a good paying job, he has been going to    a good restaurant for lunch, and very seldom eats bagel and cream cheese anymore. Draw his         Income-Consumption Curve (I-CC), and show where his equilibrium point would be

Answer 1

Previously he used to consume bagel and cream cheese together for lunch everyday. This combination of goods will be given by point A where the indifference curve is tangent to the budget line. Now as his income rises he does not prefer bagel and cream cheese together. He may however consume both of the goods independently. Given this his equilibrium will be on the horizontal or vertical axis. The income consumption curve will thus be the cross hatched sections on the 2 axes when income increases and the budget line shifts outwards. This is the cut areas on the 2 axes This is given as follows: