Q1

Assume a consumer needs to decide about the optimal amount of X & Y, where X and Y are Very Close Substitutes ( Example: X=Renting Apartments vs Y=Home Ownership).

Identify the potential Income and Substitution effects coming from an increase in Py (Increase in Cost of Owning a Home), in terms of impact on quantity consumed of X and Y (increase or decrease), and argue if the Income Effect is larger or smaller than the Substitution Effect in this case.