[Uses the Indifference Curve Approach] Howard spends all of his income on magazines and novels. Illustrate each of the following situations on a graph, with the quantity of magazines on the vertical axis and the quantity of novels on the horizontal axis. Use two budget lines and two indifference curves on each graph. a. When the price of magazines rises, Howard buys fewer magazines and more novels. b. When Howard's income rises, he buys more magazines and more novels. c. When Howard's income rises, he buys more magazines but fewer novels.

The budget line is a graphical representation of all possible combinations of two goods that a consumer can purchase with their income, given the prices of the goods. It's a straight line that shows the trade-off between the two goods. When income is held constant, any point on this line implies that all income is being spent. If the price of one good increases, the budget line rotates inward because the consumer can now afford less of that good. Conversely, if a consumer's income increases, the budget line shifts outward, illustrating an increase in purchasing power for both goods.

For example, in Howard's scenario, a rise in the price of magazines would cause the budget line to become steeper, indicating that magazines have become relatively more expensive compared to novels. Meanwhile, an increase in Howard's income would shift the budget line to the right, showing that Howard can now buy more of both magazines and novels.

The income effect illustrates how a consumer's purchasing decisions change as their real income changes, holding prices constant. If a consumer's income increases, they can afford to buy more goods, potentially shifting their consumption to a higher indifference curve representing a higher utility level. However, the way in which a consumer's purchases of certain goods change depends on whether these goods are normal or inferior.

Normal goods are those for which demand increases as income increases. Inferior goods, on the other hand, are those for which demand decreases as income goes up. In cases 'b' and 'c' of our exercise, when Howard's income increases, he buys more magazines (a normal good) but exhibits different behaviors towards novels, buying more in case 'b' and fewer in case 'c', suggesting novels could be an inferior good in the latter scenario.

The price change effect can be broken down into two components: the income effect and the substitution effect. When the price of a good changes, the consumer's purchasing power is affected (income effect) and the relative attractiveness or affordability of goods changes (substitution effect). As prices change, consumers adjust their consumption bundles accordingly.

In the exercise, when the price of magazines rises (case 'a'), we witness a combination of these effects. Howard's purchasing power regarding magazines decreases; he experiences a lower real income (income effect) and may substitute novels for magazines as they become relatively cheaper (substitution effect), resulting in fewer magazines and more novels being purchased.

Understanding consumer behavior is central to indifference curve analysis as it seeks to comprehend how consumers make choices to maximize their utility within their budget constraints. This behavior is influenced by both psychological factors, such as preferences, and economic factors, such as changes in income and prices.

Consumers aim to reach the highest indifference curve possible while staying within their budget line. As seen in Howard's examples, his behavior adjusts to various economic situations; he changes consumption when prices change, reflecting his preferences and the trade-offs he's willing to make to maximize satisfaction. This mirrors real-world consumer decisions, demonstrating the balance between desires and financial limitations.