Suppose the only goods you consume are wine and roses. On Tuesday, the price of wine goes up, and at the same time your income increases by just enough so that you are equally as happy as you were on Monday.
(1) What happens to the quantity of wine you consume? Illustrate your answer with indifference curves.
(2) On Tuesday would you still be able to afford the same basket that you were buying on Monday? How do you know?
On Wednesday there are no new price changes (so the Tuesday prices are still in effect), but your income changes to the point where you can just exactly afford Monday’s basket.
(3) Are you happier on Wednesday or on Monday?
(4) Is it possible to say with certainty whether you buy more wine on Wednesday than on
Monday? If not, on what would your answer depend?
(5) Is it possible to say with certainty whether you buy more wine on Wednesday than on Tuesday? If not, on what would your answer depend?
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