After Iraq invaded Kuwait, gasoline prices rose dramatically-up to 50 percent. There were many effects of the increased price of gasoline> Explain the following effects in terms of income effect, or the substitution effect, or both effects: a. People drove less and purchased less gas. b. People ate out less often. c. People had more tune-ups done on their cars. d. Bike sales went up. e. The sale of lottery tickets fell. f. People took vacations closer to home.
DAMON is Working on it for you so stop posting it!
Sorry, I thought I posted it undr the incorrect subject.
Thank you
I just finished the one maximizing utility of wine and cheese. I am way behind on the physics.
Jean - you can figure this one out just as easily as I can.
not eating out for example is clearly income decrease effect as is lottery budgets
bike purchases is mostly substitution
Thank you Damon for all your help this evening.
To explain the effects of the increased price of gasoline in terms of income effect, substitution effect, or both effects, let's first understand what these concepts mean:
1. Income Effect: The income effect refers to the change in consumption patterns resulting from a change in purchasing power caused by a change in price. When the price of a good increases, it reduces the consumer's purchasing power, and as a result, they may alter their consumption patterns.
2. Substitution Effect: The substitution effect occurs when consumers switch their consumption from one good to another due to a change in their relative prices. If the price of one good increases, consumers may find an alternative that is relatively cheaper and switch their consumption towards that substitute.
Now let's examine the effects mentioned in relation to these concepts:
a. People drove less and purchased less gas: This can be explained by both the income effect and the substitution effect. Due to the increased gas prices, consumers may have experienced a decrease in their purchasing power (income effect), which would lead them to reduce their overall consumption of gas. Additionally, consumers might have sought out alternative means of transportation, such as carpooling or using public transportation, in response to the higher prices (substitution effect).
b. People ate out less often: This effect can be primarily attributed to the income effect. The increased gas prices reduced consumers' purchasing power, leaving them with less disposable income to spend on eating out. As a result, they may have opted to cook meals at home instead of dining out.
c. People had more tune-ups done on their cars: This effect can also be attributed to the income effect. Consumers may have chosen to invest in car maintenance, such as tune-ups, to ensure more fuel-efficient driving and minimize their gas consumption. This decision can be seen as a response to the increased gas prices, as individuals aimed to save money in the long run.
d. Bike sales went up: This effect can be attributed to both the income effect and the substitution effect. With increased gas prices, consumers may have experienced a decrease in purchasing power (income effect), leading them to seek alternative modes of transportation. Bicycles can serve as a substitute for cars as they are relatively cheaper to maintain and operate, and they do not require gasoline for fuel.
e. The sale of lottery tickets fell: This effect can be primarily attributed to the income effect. As consumers faced higher gas prices, it reduced their disposable income, leaving them with less money available for discretionary spending, such as participating in lotteries.
f. People took vacations closer to home: This effect can be attributed to both the income effect and the substitution effect. Higher gas prices reduced consumers' purchasing power (income effect), potentially limiting their ability to afford long-distance vacations. As a substitute, individuals may have opted to choose vacation destinations closer to their homes to minimize travel costs and gas consumption (substitution effect).
In conclusion, the effects of increased gas prices can be explained by a combination of income effect and substitution effect, with the relative importance of each effect varying across different situations.