A college student has 2 options for meals: eating at the dining hall for $6 per meal, or eating a Cup O' Soup for $1.50 per meal. His weekly food budget is $60.
a. Draw the budget constrain showing the trade-off between dining hall meals and Cups O' Soup. Assuming that he spend equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A.
b. Suppose the price of a Cup O' Soup now rises to $2. Using the diagram from part (a), show the consequences of this change in price. Assume that our student now spend only 30 percent of his income on dining hall meals. Label the new optimum as point B.
c. What happened to the quantity of Cups O' Soup consumed as a result of this price change? What does this result say about the income and substitutions effects? Explain.
d. Use points A and B to draw a demand curve for Cup O' Soup. What is this type of good called?