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