David purchases two goods: bananas (x) and tea (y). Her indifference curves are smoothand convex. Suppose the price of t...
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and convex. Suppose the price of tea decreases. On a graph, illustrate the income and
substitution effects of the price change on Dianaâs optimal consumption bundle for each
of the following cases:
(a) Tea is an inferior good for Diana, but not a Giffen good.
(b) Dianaâs income elasticity of demand for tea is zero.
(c) Bananas and tea are both normal goods.