You consume two goods, X and Y . On Tuesday, the price of Y (not X!!) rises. On Wednesday, there are no new price changes, but your income rises until you are just as happy as you were on Monday.

1. Draw your budget lines and optimum points on all three days. Label the optima M, T and W.

2. In terms of the locations of the optimum points, what would it mean for Y to be a Giffen good?

3. In terms of the locations of the optimum points, what would it mean for X to be a normal good?

4. Suppose that X is a normal good, and suppose also that you consume more X on Tuesday than on Monday. When the price of Y changes, which effect on your X-consumption is larger: the income effect or the substitution effect? Justify your answer in terms of the locations of the points on your graph. Suppose that there are two kinds of cars: cheap cars that get l