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9. Tncome and Substitution Effects Charles and Dina are two friends living in San Diego who love to try different restaurants in their city, but have specific preferences regarding venues for certein meals. in particutar, they like to ent out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves I. and 1 repretenit two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of sapo bvaliable to spend on going out to eat, and further, that the price of a diner brunch is always $10. Each labeled point represents tangency between a budget constraint and the corresponding indifference ourve. The initial bodget constraint (BC1) shows the two triends' budget constraint when the price of an upscale dinner is 5160 . At this price, Charles and Dinh wisuld choose te contume two unscale dinners. The initial budget constralnt (BC ) shows the two friends' budget constralnt when the price of ari upseale dinner is $160. At this price, Charfes and Dina would choose to consume two upscale dinners. Suppose that the price of an upscale dinner decreases to $40, shilting their budget constraint to BC2, which represents a new relative price of four diner brunches per upscale dinter. (Hint: The blue line labeled H is parallel to BC1 and tangent to fi at point Y.) To maintain tha level of happiness they experienced before the price decrease-that is, to consume at a point along the same indifference curve as they were on initially (h)-the income spent on upscale dinners and brunch at diners would now only have to be than maintaining their original level of utiaty, the friends choose the optimal bundle along their new budget constraint. At this point, they are oft than before the price change in upscale dinners. On the following table, Indicate which point movement represents the substitution effect and incame effoct for upscale dininers when the price decreses from $160 to $40. Then indicate the censumption change that resuits from each effect. In this case, the price deatese of vorcaie dinners couses the real income of the twa friendi to bohas wial income and the difection of the income effect, upscale dinners are

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