The consumer maximizes utility by selecting a bundle of two goods (x and y) that will give the highest level of satisfaction.
a. Show, using indifference curves and a budget constraint the bundle that will maximize utility and explain why that particular bundle is preferred.
b. The price of good x increases. Show graphically and explain the new bundle selected.
c. Show and explain the income and substitution effects associated with the price increase. Assume that good x is an inferior good.