The price of chips has not changed, and so Monica can still buy 20 bags of chips if she so chooses; however, she can now afford twice as many crackers (20 bags) b. The substitution effect is measured by holding utility at the pre-change level (U 1), and considering Monica's optimal bundle with the new price ratio. To find this, use a parallel shift of the new budget constraint (BC 2) until it hits the original utility curve, label this point A. The movement from A to A represents the substitution effect. The income effect is the remainder of the difference between A and B, or the difference between A and B. The income effect is larger for crackers. c. Crackers are a normal good since Monica purchases more when her purchasing power increases (from 4 to 12) Chips, on the other hand, are inferior since Monica purchases fewer chips when her purchasing power increases (from 14 to 8) 0 4 Crackers Chips 20 A B 8 12 16 20 16 12 8 4 2 Sub. effect U 2 BC 1 BC 2 BC A 14 Inc. effect U 1