Bernice’s preferences can be represented by u(, ) = {, }, where x is pairs of earrings and y is dollars to spend on other things. She faces prices (,) = (2,1) and her income is 12. (a) Draw in pencil on the graph below some of Bernice’s indifference curves and her budget constraint. Her optimal bundle is_______ pairs of earrings and ______ dollars to spend on other things.
(b) The price of a pair of earrings rises to $ 4 and Bernice’s income stays the same. Draw her new budget constraint on the graph. Her new optimal bundle is _______ pairs of earrings and _______dollars to spend on other things.
(c) What bundle would Bernice choose if she faced the original prices and
had just enough income to reach the new indifference curve? _________ Draw the budget line that passes through this bundle at the original prices. How much income would Bernice need at the original prices to have this (red) budget line? _________
(d) The maximum amount that Bernice would pay to avoid the price increase is ________. This is the (compensating, equivalent) variation in
income. ___________
(e) What bundle would Bernice choose if she faced the new prices and had
just enough income to reach her original indifference curve? _________Draw the budget line that passes through this bundle at the new prices. How much income would Bernice have with this budget? _______
(f) In order to be as well-off as she was with her original bundle, Bernice’s
original income would have to rise by ________. Is this the compensating variation or
equivalent variation in income?(choose one) ______________