Consider a consumer who has preferences defined over commodities x and y. Suppose she is endowed with initial resources ω = (ωx,ωy) » 0 and faces prices p = (px, py).
a. Draw the consumer's budget constraint, explicitly identifying the roles of ω and p.
b. In two separate diagrams, depict one case in which she is better-off as a result of an increase in px and another in which she is worse off.
c. Graphically identify the income and substitution effects in each case.
d. Generally, discuss the effect of a consumer's market position on the sign of the income effect.