Answer to Question #196637 in Microeconomics for Muhammad hasnain

Question

Jennifer divide he income between coffee and croissants (both Of which are normal goods) and early in Frost of Brazil causes a large increase in price of coffee in the united states?

so show the effect of the frost on jennifers budget constraints

Answer 1

$Soln,$

A change in price of a product causes two effects

-Change in relative price (Substitution effect)

-Change in purchasing power (income effect)

The early frost in Brazil will cause Jennifer's budget constraint to shift to the left so as to demand less of coffee.

Since the price of coffee also rises, Jennifer's budget constraint pivots inwards and shifts to the left. From a point BC1 to BC2 as the new quantity.