A Person Consumes Two Goods: Coke and Snickers

question 125

Essay

A person consumes two goods: Coke and Snickers.Use a graph to demonstrate how the consumer adjusts his optimal consumption bundle when the price of Coke decreases.Carefully label all curves and axes.What will happen to consumption if Coke is a normal good?
What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates).

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Definitions:

Monetarist Economists

Economists who believe that variations in the money supply have major influences on national output in the short run and the price level over longer periods.

Phillips Curve

Curve showing inverse relationship between the unemployment rate and the rate of inflation.

Laffer Curve

Shows that at very high tax rates, very few people will work and pay taxes; therefore government revenue will rise as tax rates are lowered.

General Price Level

indicates the average of the current prices of all goods and services in the economy at a specific time.