1. In each of the following cases, state whether the income effect, the substitution effect, or both are significant. In which cases do they move in the same direction?

In opposite directions? Why?

a. Orange juice represents a small share of Clare’s spending. She buys more lemonade and less orange juice when the price of orange juice goes up. She does not change her spending on other goods.

b. Apartment rents have risen dramatically this year. Since rent absorbs a major part of her income, Delia moves to a smaller apartment. Assume that rental housing is a normal good.

c. The cost of a semester-long meal ticket at the student cafeteria rises, representing a significant increase in living costs. Assume that cafeteria meals are an inferior good.