Pam has chosen her best affordable combination of cookies and comic books. SHe s

Question

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 situatio 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?

Explanation / Answer

a. yes, she can. her total income is $40 per month. if the cookies are 50 cents, then 30 cookies will be costing of $15, and the remaining $25 can be used to purchase 5 comic books.

b. there wont be any differences in these two conditions also.

c. her selection will be based on the price of the product and the desires.

d. if the prices changes in the next month, then the effect is on substitution only. her income will be same and stable.

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