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19. Dave has an income of $100 which he uses to purchase paper and pencils. Both paper and pencils sell for $5 each and he buys 10 units per month of each. Suppose the price of paper increases to $10 and at the same time Dave's Uncle Slutsky starts sending Dave an extra $50 each month. This means that his new income is $150. What do you predict will happen to his consumption of paper, and why?

Dave originally bought 10 units of paper at $5 each, then the price rose to $10 and in order to compensate him for the income effect we would need to give him $50 per month (10 units x $5 price change). Since his uncle did that, removing the income effect, any change in paper consumption must be due to the substitution effect. We know that the substitution effect always leads to a change in quantity demanded that is opposite the direction of the price change. This is what we mean by "the substitution effect is always negative." Thus, his paper consumption will necessarily decrease.