Assume that Anne has $300 to spend on DVDs and CDs. Her optimal consumption of DVDs and CDs is ...

Assume that Anne has $300 to spend on DVDs and CDs. Her optimal consumption of DVDs and CDs is illustrated by a tangency between a budget line and an indifference curve. Now assume that the price of CDs rises but the price of DVDs falls. How can you show that Anne is made better off by these price changes?

• Show that the price changes shift Anne's budget line outward; the budget line is tangent to a higher indifference curve.

• Show that the price changes move Anne along her budget line to a higher indifference curve.

• Show that Anne can afford to buy the optimal combination of DVDs and CDs at their original prices; then show that Anne can now reach a higher indifference curve.

• Show that Anne can now afford to buy more DVDs, which give her greater utility than CDs.