Microsoft Word - Problem Set (Questions)
David purchases two goods: bananas (x) and tea (y). Her indifference curves are smooth and convex. Suppose the price of tea decreases. On a graph, illustrate the income and substitution effects of the price change on Diana's optimal consumption bundle for each of the following cases:
(a) Tea is an inferior good for Diana, but not a Giffen good.
(b) Diana's income elasticity of demand for tea is zero.
(c) Bananas and tea are both normal goods.