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Manuel and Poornima Taylor live in Chicago and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves 11 and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the corresponding indifference curve. ? DINER BREAKFASTS B 26 BC H 0 5 10 FANCY DINNERS The initial budget constraint (BC1) shows the Taylors' budget constraint when the price of a fancy dinner is $160. At this price, Manuel and Poornima would choose to consume two fancy dinners. Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC2, which represents a new relative price of four diner breakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to BC2 and tangent to 11 at point B.) In order to remain as happy as they were before the price decrease-that is, to consume at some point on the same indifference curve as they were on initially (11)-the Taylors' income spent on fancy dinners and breakfast at diners would now only have to be $ However, in reality, rather than maintaining their original level of utility, the Taylors choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in fancy dinners. On the following table, indicate which point movement represents the substitution effect and income effect for fancy dinners when the price decreases from $160 to $40. Then indicate the consumption change that results from each effect. Consumption Change (Quantity of fancy dinners) Fancy Dinners Represented By... Substitution Effect Income Effect In this case, the price decrease of fancy dinners causes the Taylors's real income to real income and the direction of the income effect, fancy dinners are Because of the change to Manuel and Poornima's for the Taylors. Manuel and Poornima Taylor live in Chicago and enjoy going out to fancy restaurants for dinner and to diners for breakfast. On the following diagram, the purple curves 11 and 12 represent two of their indifference curves for fancy dinners and diner breakfasts. They have $800 per month available to spend on eating out. The price of a diner breakfast is always $10. Each labeled point represents the tangency between a budget constraint and the corresponding indifference curve. ? DINER BREAKFASTS B 26 BC H 0 5 10 FANCY DINNERS The initial budget constraint (BC1) shows the Taylors' budget constraint when the price of a fancy dinner is $160. At this price, Manuel and Poornima would choose to consume two fancy dinners. Suppose that the price of a fancy dinner decreases to $40, shifting their budget constraint to BC2, which represents a new relative price of four diner breakfasts per fancy dinner. (Hint: The blue line labeled H is parallel to BC2 and tangent to 11 at point B.) In order to remain as happy as they were before the price decrease-that is, to consume at some point on the same indifference curve as they were on initially (11)-the Taylors' income spent on fancy dinners and breakfast at diners would now only have to be $ However, in reality, rather than maintaining their original level of utility, the Taylors choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in fancy dinners. On the following table, indicate which point movement represents the substitution effect and income effect for fancy dinners when the price decreases from $160 to $40. Then indicate the consumption change that results from each effect. Consumption Change (Quantity of fancy dinners) Fancy Dinners Represented By... Substitution Effect Income Effect In this case, the price decrease of fancy dinners causes the Taylors's real income to real income and the direction of the income effect, fancy dinners are Because of the change to Manuel and Poornima's for the Taylors

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