1. Ray-Ban sunglasses are a normal good. Assume that the price of Ray-Ban sunglasses increases.

a. According to the substitution effect, name three substitutions that consumers may make and state the effect on the quantity of Ray-Ban sunglasses bought.

b. Your nominal income stays the same. According to the income effect, how does your real income change and why? State the effect on the quantity of Ray-Ban sunglasses bought.

c. Combining the substitution and income effects, what is the overall effect on the quantity of Ray-Ban sunglasses bought? Does this agree with the Law of Demand?

2. SPAM (a canned meat) is an inferior good. Assume that the price of SPAM increases.

a. According to the substitution effect, state the effect on the quantity of SPAM bought.

b. Your nominal income stays the same. According to the income effect, how does your real income change? State the effect on the quantity of SPAM bought and state why.

c. Do you think SPAM takes up a small or large portion of consumer budgets? Why?

d. Combining the substitution and income effects and taking into account your answer to (c), is the income or substitution effect stronger in this case? What is the overall effect on the quantity of SPAM bought? Does this agree with the Law of Demand?