7. (10 marks)

Suppose Gary has a fixed budget to be spent on two normal goods Magazines (M) and Newspapers (N). The unit price of magazine is $50 while the unit price of newspaper is $10. Originally, he spends all his budget and purchases 10 units of magazine and 20 units of newspaper. Next month, he will move to a big city. The unit price of magazine will be $80 while the unit price of newspaper will be $20. He decides, after moving to the big city, he will increase his budget on these two goods by a total of $500.

a. After moving to the big city, can Gary maintain his original consumption bundle? Explain with necessary calculation. (3 marks)

b. Based on your result in (a), explain the income effect, substitution effect and total price effect on the consumption of the two goods after moving to the big city. Explain in words only. No calculation is required for part (b). (7 marks)

No graph is required for Question 7.