Assignment task: Guadelupe enjoys eating churros (a fried dough treat) and hot chocolate together. For every churro that she eats, she must also consume a cup of hot chocolate. They are perfect complements and everyone has the same preference.
a) When Guadelupe goes to the store, she notices that the equilibrium price of churros and the equilibrium quantity of hot chocolate have declined. She wonders what could be responsible for this occurrence - a rise in the price of milk (an ingredient for hot chocolate) or a rise in the price of ?our (an ingredient for churros). Provide your answer and illustrate with supply and demand graphs.
b) Suppose instead that the equilibrium price of hot chocolate has increased but the equilibrium quantity of churros has fallen. What could be responsible for this occurrence - an increase in the price of milk or an increase in the price of ?our?
c) If Guadelupe has two cups of hot chocolate with every churro, she gets no additional utility compared to eating just one cup of hot chocolate and one churro. Similarly, if she eats two churros and one hot chocolate, she gets no additional utility than eating just one churro and one hot chocolate. On the other hand, if she does eat two churros each with its own cup of hot chocolate, then her utility increases. Sketch out Guadelupe's indifference curves over churros and hot chocolate.