Ann lives in Princeton and commutes by train each day to her job in New York City (20 round trips per month). When the prices of a round trip goes up from $10 to $20, she responds by consuming, exactly the same number of trips as before, while spending $200 per month less on restaurant meals.
a.Does the fact that her quantity of train travel is completely unresponsive to the price increase imply that Ann is not a rational consumer?
b.Explain why an increase in train travel might affect the amount she spends on restaurant meals.
Take a shot. What do you think. Hint for a) think about opportunity cost. Hint for b) think about budget constraints.
a. Well, it's not fair for me to call Ann irrational just because she didn't change her train travel habits. Maybe she really loves trains and considers it a form of entertainment! Or perhaps she's just really dedicated to her job and doesn't want to risk being late by finding an alternative. So let's not judge Ann too quickly, she might have her reasons!
b. Ah, the mystery of train travel affecting restaurant meals! Well, one possible explanation is that Ann is saving money on train tickets now that they're more expensive. So, she's got a little extra cash in her pocket to spend on delicious restaurant meals! Maybe she's treating herself to some fancy dining options to make up for the increased train fare. Or maybe she's just so exhausted from those long train rides that she doesn't have the energy to cook and relies on restaurants for her meals. The possibilities are endless!
a. No, the fact that Ann's quantity of train travel is completely unresponsive to the price increase does not necessarily imply that she is not a rational consumer. Rational behavior refers to making decisions that maximize utility or satisfaction given the constraints and available information. It is possible that Ann's utility or satisfaction from taking the train remains constant even with the price increase, or that the alternatives to taking the train are less attractive to her. Additionally, other factors, such as the convenience or time saved by taking the train, may offset the increased cost for Ann.
b. An increase in train travel might affect the amount Ann spends on restaurant meals due to budget constraints or income effects. When the price of train travel increases, Ann might have to allocate a larger portion of her budget towards transportation expenses. This could leave her with less disposable income to spend on other goods and services, such as restaurant meals. In this case, Ann might choose to reduce her spending on restaurant meals to compensate for the increased cost of train travel. The specific amount Ann spends on restaurant meals might depend on factors such as her income level, personal preferences, and the importance she attributes to dining out compared to other expenses.
a. The fact that Ann's quantity of train travel is completely unresponsive to the price increase does not necessarily imply that Ann is not a rational consumer. Rational consumers make choices based on their preferences and constraints. In this case, if Ann values her job and the convenience of commuting by train more than the increased cost, she may choose to continue taking the same number of trips despite the price increase. This implies that she is willing to pay the higher price to maintain her chosen level of train travel.
b. An increase in train travel can affect the amount Ann spends on restaurant meals due to her limited budget. When the price of train travel increased, Ann had to allocate more of her budget to cover the increased transportation expenses. As a result, she had to cut down her spending in other areas to maintain her desired overall level of expenditure.
Since Ann's spending on restaurant meals decreased by $200 per month, it suggests that she decided to reduce her spending in that category to compensate for the increased cost of train travel. This decision was likely driven by the need to balance her overall budget and prioritize her transportation needs over dining out. By reducing her spending on restaurant meals, she was able to offset the increased transportation costs and maintain her desired level of total monthly expenditure.