Managers are very interested in how a consumer makes a choice among alternatives. In this exercise, we ask you to consider the amount of money you spend purchasing gasoline to operate your automobile for a month and any alternatives available to you assuming your net income available to make those purchases. Also assume gasoline prices for your auto rose 100% during one difficult summer as our time period for the purpose of discussion. Explain, then, the following effects in terms of the income effect, or the substitution effect, or both effects:
* You drove less and purchased less gasoline.
* You ate out less often.
* You spent less to maintain your automobile.
* You took public transportation more often.
* You bought a bicycle.
* You did not take a vacation away from home.
* You bought fewer clothes and made due with more around the home.
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i don't really know what i need to do. i need help generating ideas.
This is what you are supposed to do:
consider the amount of money you spend purchasing gasoline to operate your automobile for a month
and any alternatives available to you assuming your net income available to make those purchases.
not really helpful mrs sue
To analyze the effects of the rise in gasoline prices on your choices and expenditures, we can use the concepts of income effect and substitution effect.
1. You drove less and purchased less gasoline:
This can be explained by the income effect. Due to the increase in gasoline prices, you have less disposable income available to spend on other items. As a result, you choose to drive less and purchase less gasoline in order to allocate that reduced budget towards other necessities or preferences.
2. You ate out less often:
This can be attributed to both the income effect and substitution effect. With the rise in gasoline prices, you have less income available to spend on discretionary items like dining out. This is the income effect. Additionally, you can substitute eating out with cooking at home or packing lunch, which would be a substitution effect.
3. You spent less to maintain your automobile:
This reflects the income effect. With the increased cost of gasoline, you have less disposable income to allocate towards maintenance and repairs. Thus, you cut back on expenses related to maintaining your automobile.
4. You took public transportation more often:
This is primarily driven by the substitution effect. As gasoline prices rise, the cost of operating your automobile increases, making public transportation a more cost-effective alternative. By choosing to use public transportation, you are substituting the high-cost option (driving your car) with a lower-cost alternative.
5. You bought a bicycle:
This decision can be seen as a combination of both the income effect and substitution effect. The increased gasoline prices reduce your purchasing power, and as a result, you may not afford to invest in a new car or continue using your car. Instead, you choose to buy a bicycle, which is a cheaper form of transportation and a substitute for driving.
6. You did not take a vacation away from home:
This can be explained by the income effect. With the rise in gasoline prices, you have less disposable income available for discretionary purposes such as travel. As a result, you choose not to take a vacation away from home in order to save money.
7. You bought fewer clothes and made do with more around the home:
This reflects the income effect. The increase in gasoline prices reduces your available income, making you more budget-conscious. As a result, you choose to spend less on clothing and find alternatives within your home to meet your needs.
In summary, the effects of rising gasoline prices can be attributed to both the income effect (reduced purchasing power) and the substitution effect (finding cheaper alternatives). The specific choices you make depend on your preferences, budget constraints, and the availability of substitutes in each situation.