Jamal consumes only two goods: lollipops and chewing gum. He treats these two goods as perfect substitutes, with one lollipop being a perfect substitute for a pack of chewing gum. Initially, the price of a lollipop is $1.15, while packs of chewing gum are $2.88 each. Jamal has $20 per week to spend on these two goods. Suppose the price of chewing gum decreases to $1.72.
Required:
a. What is the substitution effect associated with the change in the price of chewing gum?
b. What is the income effect associated with the change in the price of chewing gum?
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Jamal consumes only two goods: lollipops and chewing gum. He treats these two goods as perfect subst...
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