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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).


Definitions:

New York Federal Reserve Bank

A regional bank part of the Federal Reserve System, playing a key role in monitoring and executing monetary policy in the United States.

Discount Rate

The rate of interest the Fed charges to loan money to any banking institution to meet reserve requirements.

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