Problem
There are two types of mangoes, that are high-quality mangoes x1 and low-quality mangoes x2. In Country A, the market price for a kilogram of high-quality mangoes is higher than that for a kilogram of low-quality mangoes, that is P1>P2. Country A does not trade with other countries.
1. Consumers in Country A would choose between high- and low-quality mangoes. Draw a budget constraint of the consumers in Country A, and optimal choice that these consumers would make. Explain how the consumers in Country A makes a consumption decision, using the diagram.
2. Then, the price of high-quality mangoes falls due to improved agricultural technology. Explain how this price fall would affect the consumers' response in terms of the substitution and income effects, assuming that all mangoes are normal goods. Illustrate your analysis with a diagram.
3. Suppose that, now, there is Country B. Country A and Country B are two different markets, and they do not trade with each other. Both types of mangoes in Country B are more expensive than those in Country A by the amount of c. Assuming the consumers in both Country A and Country B have the same level of income, compare the slope of the budget constraint of the consumers in Country B to that of the budget constraint of the consumers in Country A. [