Question

[Uses the Indifference Curve Approach] a. Draw a budget line for Cameron, who has a monthly income of \(\$ 100 .\) Assume that he buys steak and potatoes, and that steak costs \(\$ 10\) per pound and potatoes cost \(\$ 2\) per pound. Add an indifference curve for Cameron that is tangent to his budget line at the combination of 5 pounds of steak and 25 pounds of potatoes. b. Draw a new budget line for Cameron, if his monthly income falls to \(\$ 80 .\) Assume that potatoes are an inferior good to Cameron. Draw a new indifference curve tangent to his new budget constraint that reflects this inferiority. What will happen to Cameron's potato consumption? What will happen to his steak consumption?

Short answer

After a decrease in income, it is likely that Cameron will consume more potatoes since they are cheaper and are considered an inferior good. At the same time, he may reduce his steak consumption due to reduced affordability.

Step-by-step solution

Draw the budget line

On a graph, plot 'steak' on the x-axis and 'potatoes' on the y-axis. The budget line for Cameron will be a straight line given by the equation \(10S + 2P = 100\), where S represents pounds of steak and P represents pounds of potatoes. This line shows all combinations of steak and potatoes that Cameron can purchase given his income and the prices of these goods.

Draw the indifference curve

An indifference curve represents a set of bundles of goods, each of which the consumer values equally. It is tangent to Cameron's budget line at the given point - when the consumer buys 5 pounds of steak and 25 pounds of potatoes. Draw an indifference curve on the graph that touches the budget line at this point.

Draw the new budget line

Due to Cameron's reduced income, the new budget line will be based on the equation \(10S + 2P = 80\). We draw this new line on the same graph.

Draw the new indifference curve and discuss consumption

As potatoes are an inferior good for Cameron, they would be less preferred as income decreases. Hence, the new indifference curve, reflecting this inferiority, may be skewed towards steak and away from potatoes. Again, this curve should be tangent to (touch) the new budget line. As income has decreased, consumption of potatoes (the inferior good) might increase, while steak consumption could decrease.