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Pam has made her best affordable choice of cookies and granola bars. She spends all of her weekly income on 30 cookies at $1 each
Pam has made her best affordable choice of cookies and granola bars. She spends all of her weekly income on 30 cookies at $1 each and 5 granola bars at $2 each. Next week, she expects the price of a cookie to fall to 50 and the price of a granola bar to rise to $5.
- Will Pam be able to buy and want to buy 30 cookies and 5 granola bars next week?
- Which situation does Pam prefer: cookies at $1 and granola bars at $2 or cookies at 50 and granola bars at $5?
- If Pam changes how she spends her weekly income, will she buy more or fewer cookies and more or fewer granola bars?
- When the prices change next week, will there be an income effect, a substitution effect, or both at work?
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