Reference no: EM132488613

Dave is a student and has a budget of $48 a month, which he spends on ra- men noodles (which cost $2 per package) and coffee (which cost $3 per bag).

(a) Draw Dave's budget constraint (coffee on the horizontal axis) and include the intercept points.

(b) Given that Dave buys 6 bags of coffee a month, how many packages of noodles does he buy (assume that Dave is a utility maximizer)? Draw a graph with the budget curve, indifference curve and label his choice as A.

(c) The price of coffee drops down to $2 a bag, this makes Dave rather happy and he increases his consumption to 8 bags a month. Again draw a graph with the budget curve, indifference curve and label his choice as B.

(d) A tragedy has struck and a fire broke out at a major coffee producer creating a disruption to the supply of coffee which has resulted in a price increase to $4. As a result, Dave has to cut his consumption of coffee to 5 bags per month. Draw the new budget constraint indicate his chosen bundle labelled C with an appropriately drawn indifference curve.

(e) Draw a new diagram below your indifference curve diagram. Use your previous answers to draw Dave's demand for coffee. Indicate the quantities demanded at prices of $2, $3, and $4. Is there an inverse relationship between price and quantity demanded?