We ended the previous chapter by looking at the cross-price effect, and we saw that it could be either positive or negative, depending on preferences. Have you figured out what the cross-price effect is under Cobb-Douglas preferences? The answer is: it’s zero! With these preferences, a change in the rent does not affect the demand for other goods, and a change in the price of other goods does not affect the choice of your home base. To understand why, we will take a closer look at the effect of a price change. This effect can be split into two sub-effects: the substitution effect (SE) and the income effect (IE). We will also examine how a change in income affects consumption. One might assume that higher income necessarily leads to higher consumption, but this is not always the case. To clarify, we divide goods into two types: normal goods and inferior goods.