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Suppose Sam considers tea and coffee to be perfect one-for-one substitutes and spends $12/week on these two beverages. Coffee costs $1/cup and tea costs $1.20

Suppose Sam considers tea and coffee to be perfect one-for-one substitutes and spends $12/week on these two beverages. Coffee costs $1/cup and tea costs $1.20 per cup. Use a well labelled graph to determine and explain the total, income, and substitution effects of an increase in the price of coffee to $1.50 per cup. Use the Hicks method to decompose the total effect into the income and substitution effects.

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