Will there be an income and a substitution effect at work

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Reference no: EM13212328

Pam has chosen her best affordable combination of cookies and comic books. She spends all of her income on 30 cookies at $1 each and 5 comic books at $2 each. The price of a cookie falls to 50 cents and the price of a comic book rises to $5.

a. Will Pam be able to and want to buy 30 cookies and 5 comic books next month?

b. Which situation does Pam prefer: cookies at $1 and comic books at $2 or cookies at 50 cents and comic books at $5?

c. If Pam changes the quantities that she buys, which good will she buy more of and which will she buy less of?

d. When the prices change next month, will there be an income effect and a substitution effect at work or just one of them?

Reference no: EM13212328

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