Question: 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¢ and the price of a granola bar to rise to $5.
a. If Pam changes how she spends her weekly income, will she buy more or fewer cookies and more or fewer granola bars?
b. When the prices change next week, will there be an income effect, a substitution effect, or both at work?