The substitution and income effect of this price increase

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Mike spends all his money on Jelly Beans and Gummy Bears and these two products are perfect substitutes for Mike.

A few of Mike’s indifference curves are shown in the figure below. The dark line L is Mike’s budget line at current prices. The Jelly Beans manufacturing company is contemplating an increase in the price of Jelly Beans. After the price increase, Mike’s budget line will be the one shown by the dark line M.

Show (in the figure that you have drawn) Mike’s optimal choices before and after the price increase. Draw the compensated budget line and show the substitution and income effect of this price increase.

Reference no: EM131000920

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