A consumer consumes 2 goods (X and Y) and has convex indifference curves for the two goods. In period 1 the price of each good is 2 and the consumer’s income is 8. In period 2 income and the price of Y are constant, but the price of X declines to 1. Suppose X is a normal good.
a. On a single graph, draw and label the budget lines for period 1 and period 2, and sketch in and label indifference curves associated with the optimal consumption bundles in the two periods.
b. On the same graph, sketch in and label the substitution effect and the income effect.