Indicate the income and substitution effects

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You have $100 to spend on food and clothing. The price of food is $5 and the price of clothing is $10. “It is not possible for a fall in the price of clothing to $5 to reduce the amount of clothing purchased.” Draw a graph to show whether this statement is true or false and state whether it is true or false. Be sure to (i) graph you budget constraint under the initial prices with clothing on the horizontal axis and indicate the slope of the budget constraint and the consumer’s optimization point, (ii) show how the budget constraint changes with the new price and indicate the new optimization point; and (iii) indicate the income and substitution effects.

Reference no: EM131094865

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