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This assignment is based on the two videos posted on Canvas under Module 4 (Consumer’s budget constraint and indifference curves & The substitution and Income Effects). Assume that a consumer consumes two goods, movies and soda, and assume that these goods are normal goods. Show graphically using budget constraints and indifference curveshow the decrease in the price of movies changes the quantity demanded for both sodas and movies (the price effect) (max. 1 point)how we can isolate the substitution effect for movies and soda, and whether the substitution effect increases or decreases the quantity consumed for each good (max. 1.5 points)how we can isolate the income effect for movies and soda, and whether the income effect increases or decreases the quantity consumed for each good. (max. 1.5 points)Put movies in the x-axis and soda in the y-axis and label everything in your diagram.Provide feedback on someone else’s reply. (max 1 point)You may use whichever tool you want to draw your diagram(s) (DrawIO or another online graphing tool, Word, Excel or, paper and pencil), but you must include your diagrams to your reply.Here are instructions how to embed you DrawIO diagram into Canvas: DrawIO info for Canvas (Links to an external site.)Links to an external site. and Additional DrawIO info (Links to an external site.)Links to an external site..

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Topic: Discussion on Consumer Choice (Module 4) (due Monday, June 17th) (5 points)
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Discussion on Consumer Choice (Module 4) (due Monday, June 17th) (5 points)
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This assignment is based on the two videos posted on Canvas under Module 4 (Consumer’s budget constraint and indifference
curves & The substitution and Income Effects). Assume that a consumer consumes two goods, movies and soda, and assume that
these goods are normal goods. Show graphically using budget constraints and indifference curves
1. how the decrease in the price of movies changes the quantity demanded for both sodas and movies (the price effect) (max. 1
point)
2. how we can isolate the substitution effect for movies and soda, and whether the substitution effect increases or decreases the
quantity consumed for each good (max. 1.5 points)
3. how we can isolate the income effect for movies and soda, and whether the income effect increases or decreases the quantity
consumed for each good. (max. 1.5 points)
Put movies in the x­axis and soda in the y­axis and label everything in your diagram.
Provide feedback on someone else’s reply. (max 1 point)
You may use whichever tool you want to draw your diagram(s) (DrawIO or another online graphing tool, Word, Excel or, paper and
pencil), but you must include your diagrams to your reply.
Here are instructions how to embed you DrawIO diagram into Canvas: DrawIO info for Canvas
(https://iastate.box.com/s/5bv35le6qb0trabn2to70c6ji57h2e5s) and Additional DrawIO info
(https://iastate.box.com/s/fbbal7vzhl3txbara7i2blzfasxtmcy9) .
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Topic: Discussion on Consumer Choice (Module 4) (due Monday, June 17th) (5 points)
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Anni Isojaervi

(https://canvas.iastate.edu/courses/60117/users/38114)
May 14, 2019
Answer on Discussion 4.
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Adam Crosser

(https://canvas.iastate.edu/courses/60117/users/27930)
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1. The price effect is equal to the substitution effect plus the income effect. This means that when price decreases consumer
purchasing power is increased (income effect) as well as decreased price makes it more attractive for consumers to substitute
the now cheaper good for another good.
2. We know that when the price of a good falls the consumer always purchases more of that good compared to other goods. The
substitution effect when the price of movies decreases is that more movies will be purchased relative to other goods. The
direction of the substitution effect never changes (user always consumes more of a good relative to other goods when the price
falls). This most likely means that consumption of movies will increase while consumption of soda will decrease. This is
represented as movement along the budget line.
3. In regard to the income effect, when price falls the consumer purchasing power increases. This allows the consumer to now
reach a higher indifference curve due to the income effect. If movies are a normal good the quantity demanded increases when
income increases. For an inferior good the income affect is negative and when incomes increase consumers purchase less of
the good. In this instance I assume that movies and soda are both normal goods. ‘
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Topic: Discussion on Consumer Choice (Module 4) (due Monday, June 17th) (5 points)
The diagram I have created given below illustrates the income effect and substitution effect in relation to the budget curve and
Searchcurve.
entriesThe
or author

 e.g. point A to point B as the price of movies
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the indifference
substitution effectUnread
causes movement
from
decreases
consumers substitute movies for sodas. The income effect causes the budget line to move to the right on the x axis as
purchasing power has increased and consumers can now purchase more movies in relation to their previous budget curve.
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Huanjie Chen

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1. because of the total income is constant, the decreasing price of movies means that consumers have more money to purchase
more sodas and movies, therefore, a decrease in the price of movies will increase the quantity demanded for both sodas and
movies.
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2. when the income is constant, as the price of movie decreases, the consumer will substitute more quantity for each good than
others; if the price rises, the consumer will substitute less quantity for that good than others.
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3. because sodas and movies are normal goods, income effect reinforces substitutions. As income increases, the quantity
consumers purchase for each good increases; otherwise, the quantity consumed for each good decreases.
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Jeongin Moon
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(https://canvas.iastate.edu/courses/60117/users/61968)


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Hi Huanjie,
This is a very clean graph you created. I can clearly see the substitution, income, and price effect it had on the consumers
and it is very interesting to see how these changes the consumers differently. I also appreciate how you mentioned that
these goods were normal goods as if it was inferior goods, it would affect the graph differently.
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Jeongin Moon

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