Elon eats only strawberries and bananas, both normal goods. He has
an annual budget of $120 to buy any mix of strawberries and bananas he wants. He is currently maximizing utility by consuming 30 pounds of each.
Strawberries cost $3/lb and bananas cost $1/lb.
A. Draw Elon’s budget constraint for strawberries and bananas on a graph, with strawberries on the X axis.
B. Explain the difference between substitution and income effect.
C. Explain how each of the effects will affect Elon’s final consumption bundle If the price of bananas increases to $2.50/lb.
D. Draw a new graph and Isolate substitution and income effect if the price of bananas increases to $2.50/lb. Leave strawberries on the X axis. Make sure to draw and label budget constraints, indifference curves, effects and final consumption bundle.
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