Horizontal axis and vertical axis

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Consider two goods: apples and oranges. Draw an indifference curve diagram that shows apples on the horizontal axis and oranges on the vertical axis, an individual’s budget constraint, and the bundle (5 apples, 5 oranges) being the optimal consumption choice. Then, assume the price of oranges increase while the price of apples remains the same. How would the consumer react to such price increase—i.e., demand more, the same, or fewer oranges and/or apples? Include in your answer how the substitution and income effects determine the consumer’s choice after the increase in the price of oranges occurs. (Notice: you shall submit any graph as part of your answer; the graphical analysis shall serve to assist you in explaining your answer.)

Reference no: EM131174595

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