Show the substitution effect and the income effect

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Reference no: EM131094787

Emma spends all her money on sneakers and coffee. Emma’s budget is $50 and the price of sneakers is $10. The optimal bundle for Emma varies with the price of coffee and is as follows:

Case 1: (1 pair of sneakers, 10 cups of coffee)

Case 2: (2 pair of sneakers, 5 cups of coffee)

a. According to the information above what is the price of coffee in case 1 and in case 2?

b. On a graph, show the optimal bundle for cases 1 and 2. Then show the substitution effect and the income effect when price of coffee changes from case 1 to case 2.

c. Do you have enough information to sketch the demand curve for coffee? If yes, draw it, if not, explain why. Do you have enough information to sketch the demand curve for sneakers? If yes, draw it, if not, explain why.

Reference no: EM131094787

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