(a) Mr. and Mrs. Bridgewater owned their own home. There was a real estate boom in their town and the price of houses doubled. Their income and other prices stayed constant. The Bridgewaters complained that "we are being driven from our home; we can't afford to live here any more."

i. Draw a diagram that illustrates what happened to the Bridgewaters' budget constraint.

ii. Could they have been made worse off by the change? Could they have been made better off? Explain why.

(b) Use a diagram to prove that in case there are two goods, the substitution effect of an increase in the price of good x reduces the demand for good x.