Substitution effect and income effect when pm changes

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Reference no: EM131160055

Suppose Lady Gaga spends all her money on make-up and clothing. When the price of makeup (Pm) is $10 and the price of clothing (Pc) is $20, Gaga’s optimal bundle is Qm(ake-up)= 4 and Qc(lothing)=3. When Pm = $20 and Pc =$20, Gaga’s optimal bundle is Qm=3 and Pc=2. When Pm =$5 and Pc =$20, Gaga’s optimal bundle is Qm=8 and Pc=3.

a. What is Gaga’s budget? Why?

b. On a graph show the substitution effect and the income effect when Pm changes from $10 to 20$. Explain what the substitution and income effects are.

c. Do you have enough information to sketch the demand curve for make-up? Explain why, and if possible draw it. Do you have enough information to sketch the demand curve for clothing? Explain why and, if possible, draw it.

Reference no: EM131160055

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