The answer to our puzzle is that, in this case, the income effect has the opposite sign from the substitution effect. This is because Ramen is an inferior good.

    Even though the compensated budget represents a higher level of income than the higher price budget, she buys more, RN, than she would if she were on the compensated budget where she would buy RC. Lower income is associated with higher consumption, meaning that Ramen is an inferior good for her. In this case the income effect and the substitution effect work in opposite directions.

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