Sam consumes green eggs and ham. Ham and green eggs are both normal goods.
a. Draw an indifference curve and budget constraint where Sam is consuming an optimal combination of the goods. Draw your indifference curve such that green eggs and ham are neither perfect substitutes nor perfect complements (exhibit diminishing marginal rates of substation). Put green eggs on your x-axis and ham on your y-axis.
b. One day the price of green eggs falls. On your graph in part a, show what happens to Sam's budget constraint, indifference curve, and optimal consumption of green eggs and ham.
c. Using words, what is meant by the substitution effect and income effect due to a change in the price of green eggs? (In your answer, note if anything else is held constant.)
d. Identify on your graph, the substitution effect, income effect and total effect for both ham and green eggs due to the price of green eggs changing.
e. In a chart or in words, describe the substitution effect, income effect and total effect for both ham and green eggs due to the price of green eggs changing.