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 constraints, illustrate the amount of soda and pasta that Jim will purchase. When he gets to the store, he finds that 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?
What will be an ideal response?
If quantity of soda is measured along the horizontal axis and that of pasta is measured along the vertical axis, a reduction in the price of soda pivots out Jim's budget constraint along the horizontal axis. His new consumption bundle, containing a lot more soda, is located on the higher indifference curve that lies to the right of his initial highest attainable indifference curve. In response to a lower price, he changes his behavior to buy more of the good with the lower relative price. Consumers generally respond to the incentives given by prices. At lower prices, consumers demand greater amounts. Depending on the location of the indifference curve, he may choose to consume more of both pasta and soda.
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