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A college student has two options for meals:
eating at the dining hall for $6 per meal, or eating a Cup O’ Soup for $1.50 per meal. His weekly food budget is $60.
a. Draw the budget constraint showing the trade-off between dining hall meals and Cups O’ Soup. Assuming that he spends equal amounts on both goods, draw an indifference curve showing the optimum choice. Label the optimum as point A.
b. Suppose the price of a Cup O’ Soup now rises to $2. Using your diagram from part
(a), show the consequences of this change in price. Assume that our student now spends only 30 percent of his income on dining hall meals. Label the new optimum as point B.
c. What happened to the quantity of Cups O’ Soup consumed as a result of this price change? What does this result say about the income and substitution effects? Explain
d. Use points A and B to draw a demand curve for Cup O’ Soup. What is this type of good called?
Are there any current subsidy or welfare issues?
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