In each of the following situations, describe the substitution effect and, if it is significant, the income effect. In which direction does each of these effects move? Why?
a. Ed spends a large portion of his income on his children's education. Because tuition fees rise, one of his children has to withdraw from college.
b. Homer spends much of his monthly income on home mortgage payments. The interest on his adjustable-rate mortgage falls, lowering his mortgage payments, and Homer decides to move to a larger house.
c. Pam thinks that Spam is an inferior good. Yet as the price of Spam rises, she decides to buy less of it.