Problem 5: SE & IE
A college student has two options for meals: eating at the dining hall (D) for $6 per meal,
or eating a bread (B) for $1.50 per meal. Her budget is $60.
1. Draw the budget constraint showing the trade-off between dining hall meals and bread.
Assuming that she spends equal amounts of expenditure on both goods as her optimum
choice. What is this optimal choice (D,B)? Label the optimum as point A.
2. Suppose the price of a bread now rises to $2. Using your diagram from part (1), show
how the change in price affect the budget line. Assume that the student now spends
only 30 percent of her income on dining hall meals as her optimal choice. What is this
optimal choice (D',B')? Label the new optimum as point B.
3. Use points A and B to draw a demand curve for bread.
4. Please write down the definitions of inferior good and normal good. For the student,
is bread a normal good or an inferior good? Please explain.
(Hint: Changes in consumption caused by this price change can be decomposed into
substitution effect and income effect.)