Pam has made her best affordable choice of cookies and granola bars. She spends all of her weekly income on 30 cookies at $1 each and 5 granola bars at $2 each. Next week, she expects the price of a cookie to fall to 50 cents and the price of a granola bar to rise to $5.
a) Will Pam be able to buy and want to buy 30 cookies and 5 granola bars next week?
b) Which situation does Pam prefer: cookies at $1 and granola bars at $2 or cookies at 50 cents and granola bars at $5?
c) If Pam changes how she spends her weekly income, will she buy more or fewer cookies and more or fewer granola bars?
d) When the prices change next week, will there be an income effect, a substitution effect, or both at work?