Assume a consumer who buys only two goods: a low-quality good and a high-quality good. We observe the following phenomenon: the price of the low-quality good decreases, the price of the high-quality good does not change, and the consumer increases her consumption of the high-quality good while lowering her consumption for the low-quality good.

a) Can this phenomenon be explained by the standard theory of consumer behavior? Show in a diagram. (

b) What can you say about the signs of the price, income, and cross elasticity of demand in this case? Interpret these elasticities.

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