You must label your graph, identify key points and quantities, and answer the question to receive full credit. Use the numbers in the question as appropriate in your graphs.
Consider a consumer that consumes only two goods, clothing and food. For this consumer, clothing is a normal good and Food is an inferior good. The consumer has weekly income of $400. In the initial situation, the price of clothing is $20/unit and the price of food is $5/unit. In the initial situation, the consumer spends 3/4 of her income on food and 1/4 on clothing.
a) Please use an indifference curve-budget constraint diagram to draw the consumer decision in the initial situation. Label any key points.
b) Now consider an increase in the price of clothing to $40/unit. Show the new optimum decision of the consumer. Please state and show the substitution effect, the income effect and the total effect of the price change on the consumer’s demand for both clothingand food.
c) Please show the effect of the increase in the price of clothing on the demand curve for clothing and the demand curve for food. If all consumers are the same (and the supply curve for food is unchanged), what will happen to the equilibrium price of food when the price of clothing increases?