Ian
buys only chocolate-chip cookies and cashew nut milk. In year 1,
Ian earns $100. Cashew nut milk costs $2 per quart, and
chocolate-chip cookies cost $4 per dozen. Draw a graph indicating
Ian's budget constraint and an indifference curve indicating
optimum consumption. Then suppose that in year 2 all prices
increase by 10% and that Ian's salary increases by 10% as well. On
the same graph, draw Ian's new budget constraint and optimum
consumption. Briefly explain how Ian's optimal combination of
cashew nut milk and chocolate-chip cookies in year 2 compares to
the optimal combination in year 1.