Problem
Joe's income consumption curve for tea is a vertical line on an optimal choice diagram, with tea on the horizontal axis and other goods on the vertical axis.
a) Show that Joe's demand curve for tea must be downward sloping.
b) When the price of tea drops from $9 to $8 per pound, the change in Joe's consumer surplus (i.e., the change in the area under the demand curve) is $30 per month. Would you expect the compensating variation and the equivalent variation resulting from the price decrease to be near $30? Explain.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.