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[See Solution] Consider the following diagram: Label each indifference curve and use numbers to reflect the quantity at initial equilibrium at point A under

Question: Consider the following diagram:

  1. Label each indifference curve and use numbers to reflect the quantity at initial equilibrium at point A under the assumption of utility maximization.
  2. Suppose the price of good 2 decreases. Determine the new equilibrium and label it C. Use numbers to reflect the quantities. What type of goods are goods 1 and 2? Explain using the information in the diagram as a reference.
  3. Identify the substitution and income effects on the diagram. Is the substitution effect negative? Is good 2 a normal or an inferior good?

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