A student's income is $50. Lunch at the cafeteria costs $5, and movies at the Student Union cost $2 each.
(a) Draw the budget line to scale, with lunch on the vertical axis; insert some regularshaped smooth convex indifference curves, and choose the tangency equilibrium, denoted by E0.
(b) If the price of lunch falls to $2.50, draw the new budget line. What can be said about the new equilibrium relative to E0 if both goods are normal?
(c) If the price of movies also falls to $1, draw the new budget line and illustrate a new equilibrium.
(d) How does the equilibrium in part (c) differ from the equilibrium in part (b)?