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5. Coke and Pepsi are perfect one-for-one substitutes for Roger. Suppose he has $10 to spend, and each drink (of either type) costs $1. a.
5. Coke and Pepsi are perfect one-for-one substitutes for Roger. Suppose he has $10 to spend, and each drink (of either type) costs $1. a. We know that Roger consumes 4 Cokes and 6 Pepsis. Show the equilibrium (budget and indifference curve) on a graph. What is odd about this equilibrium picture? b. Now assume the price of Coke rises to $2. Find the new equilibrium on a graph, and find the substitution and income effects resulting from the price change. c. Can you make any general statements about the relative magnitude of the income and substitution effects from a price change when we start with an equilibrium like the one in part (Hint: it helps to play with a few possibilities, trying things until some idea emerges.)
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