Question:

John has a paper route and spends all his weekly allowance on hamburgers and pop. The price of a hamburger is $2 and the price of a pop is $1. Every week John buys 20 hamburgers and 10 pop. If the price of a hamburger rises to $4 (because of a ban on beef imports) and the price of a pop falls to 50 cents. Draw indifference curves to answer the following:

a) given the change in prices will John be able to purchase his usual quota of 20 hamburgers and 10 pop? Will John still want 20 hamburgers and 10 pop?

b) If John is compelled to change the quantities of the products will he buy more hamburgers or more pop? Explain.

c) What prices change is it an (i) income effect? (ii) a substitution effect? (iii) or both?