The only goods that Angela consumes are wine (X) and chocolate (Y). On Tuesday the price of wine goes up, though at the same time, Angela's income increases by just enough so that she is equally happy (in utility terms) as she was on Monday.
A. What happens to the quantity of wine that Angela consumes between Monday and Tuesday? Use a diagram containing features of the consumer choice problem.
B. On Tuesday, would Angela still be able to afford the same basket that she purchased on Monday? How do you know?
On Wednesday there are no new price changes (so the Tuesday prices are still in effect), but Angela's income changes to the point where she can afford Monday’s basket.
C. Is Angela happier (in utility terms) on Wednesday or on Monday? Explain why.