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Illustrate the income and substitution effects

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Reference no: EM131237429

David purchases two goods: bananas (x) and tea (y). Her indifference curves are smooth and convex. Suppose the price of tea decreases. On a graph, illustrate the income and substitution effects of the price change on Diana's optimal consumption bundle for each of the following cases:

(a) Tea is an inferior good for Diana, but not a Giffen good.

(b) Diana's income elasticity of demand for tea is zero.

(c) Bananas and tea are both normal goods.

Reference no: EM131237429

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