indifference curve analysis
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Question:
Jim Range has to choose between buying more soda or more pasta for the week. He has a fixed income and he knows the prices of both products. Using indifference curves and budget constraint lines, illustrate the amount of soda and pasta that Jim will purchase. When he gets to the store, he finds the price of soda has fallen dramatically. How does this change his optimal purchase? Can a general rule of human behavior be developed from this graphical example?
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Solution Summary
This solution discusses an indifference curve analysis.
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Before the cost of soda declined, Jim purchased the amounts given by the dotted lines. This is where the budget constraint intersected one of his indifference cures. When the price declined, the budget line moved outward along the soda axis, so that it now intersects a different indifference curve. The intersection of the new ...
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