Hubert and Kate are two friends living in Detroit who love to try different restaurants in their city, but have specilic preferences regarding venues for certain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves I1 and I2 represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $1,000 available to spend on going out to eat, and further, that the price of a diner brunch is always $10. Each labeled point represents tangency between a budget constraint and the corresponding indifference curve. The initial budget constraint ( BC1 ) shows the two friends' budget constraint when the price of an upscale dinner is $100. At this price, Hubert and Kate would choose to consume five upscale dinners. Suppose that the price of an upscale dinner decreases to $50, shifting their budget constraint to BC2, which represents a new relative price of five diner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC2 and tangent to I1 at point M.) To maintain the level of happiness they experienced before the price decrease-that is, to consume at a point along the same indifference curve as they were on initially (I1)-the income spent on upscale dinners and brunch at diners would now only have to be - However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners. On the following table, indicate which point movement represents the substitution efrect and income efrect for upscale dinners when the price decreases from $100 to $50. Then indicate the consumption change that results from each efrect. In this case, the price decrease of upscale dinners causes the real income of the two friends to . Because of the change to Hubert and Kate's real income and the direction of the income effect, upscale dinners are for the friends..

1. Hubert and Kate are two friends living in Detroit who love to try different restaurants in their
city, but have specilic preferences regarding venues for certain meals. In particular, they like to
eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the
purple curves I1 and I2 represent two of their indifference curves for upscale dinners and diner
brunches. Assume that the friends have a monthly budget of $1,000 available to spend on going
out to eat, and further, that the price of a diner brunch is always $10. Each labeled point
represents tangency between a budget constraint and the corresponding indifference curve. The
initial budget constraint ( BC1 ) shows the two friends' budget constraint when the price of an
upscale dinner is $100. At this price, Hubert and Kate would choose to consume five upscale
dinners. Suppose that the price of an upscale dinner decreases to $50, shifting their budget
constraint to BC2, which represents a new relative price of five diner brunches per upscale
dinner. (Hint: The blue line labeled H is parallel to BC2 and tangent to I1 at point M.) To
maintain the level of happiness they experienced before the price decrease-that is, to consume at
a point along the same indifference curve as they were on initially (I1)-the income spent on
upscale dinners and brunch at diners would now only have to be - However, in reality, rather
than maintaining their original level of utility, the friends choose the optimal bundle along their
new budget constraint. At this point, they are off than before the price change in upscale dinners.
On the following table, indicate which point movement represents the substitution efrect and
income efrect for upscale dinners when the price decreases from $100 to $50. Then indicate the
consumption change that results from each efrect. In this case, the price decrease of upscale
dinners causes the real income of the two friends to . Because of the change to Hubert and Kate's
real income and the direction of the income effect, upscale dinners are for the friends.