Enlighten whether the effects are income or substitution when the cost of living increases and when there is a reduction in the purchasing power of your income. Concept Introduction: Income effect: This is described as the change in the quantity of goods and services due to a change in the income of the people. Substitution effect: This is an economic theory in which when the price rises or income of the people falls, people will substitute the dearer goods with less expensive alternative goods.

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Kamika lives in Chicago but goes to school in Tucson, Arizona. For the last 2 years, she has made four trips home each year. During 2010, the price of a round-trip ticket from Chicago to Tucson increased from 350 to 600. As a result, Kamika decided not to buy a new outfit that year and decided not to drive to Phoenix with friends for an expensive rock concert. QUESTION: By using this example, explain why both income and substitution effects might be expected to reduce Kamika’s number of trips home

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Chapter 12, Problem 2P

To determine

Enlighten whether the effects are income or substitution when the cost of living increases and when there is a reduction in the purchasing power of your income.

Concept Introduction:

Income effect:

This is described as the change in the quantity of goods and services due to a change in the income of the people.

Substitution effect:

This is an economic theory in which when the price rises or income of the people falls, people will substitute the dearer goods with less expensive alternative goods.

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Kamika lives in Chicago but goes to school in Tucson, Arizona. For the last 2 years, she has made four trips home each year. During 2010, the price of a round-trip ticket from Chicago to Tucson increased from 350 to 600. As a result, Kamika decided not to buy a new outfit that year and decided not to drive to Phoenix with friends for an expensive rock concert. QUESTION: By using this example, explain why both income and substitution effects might be expected to reduce Kamika’s number of trips home

Q42 Suppose the price of potatoes falls and we observe a decrease in an individual's purchases of potatoes. Which of the following can we infer? a. The substitution effect outweighs the income effect. b. The income effect just offsets the substitution effect. c. The income effect is negative and reinforces the substitution effect. d. The income effect is positive and exceeds the substitution effect. e. The income effect is negative and outweighs the substitution effect.

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