Substitution and Income Effects - 1214 Words

Substitution and Income Effects Abstract This paper examines the effects of gasoline price increase over the period of a summer. It looks at the income effect and substitution effect of different scenarios to determine how the author should best make up the difference in cost based on the same income. Seven scenarios are examined; driving less, eating out less, less spent on maintenance, public transportation, bicycle, no vacation and fewer extra expenses. Using graphs to demonstrate the income effect and substitution effect, it is easier to see which is the best solution. Substitution and Income Effects Substitution and income effects are a part of everyday life. This paper examines the substitution and income effects of†¦show more content†¦The bicycle wouldn’t be able to substitute in as many instances as public transportation, however would still show some savings. The author would still be paying for gasoline to drive to and from work, approximately half of the gasoline budget, however, would save half by riding a bicycle the other half of the time. Thus, saving $120 a month. The total including the purchase of the bicycle would be $260 for the increased price, however, it would still be more than in the spring by $100. Vacation The author takes a vacation every summer by driving to the desired location. This causes increase in the amount of gasoline used, thus the amount spent on gasoline the week of vacation. If the author does not take vacation, then they would save money on gasoline and the cost of the vacation it’s self. They would also need less maintenance on the automobile. This would be both an income effect and a substitution effect. Other purchases Along with passing on vacation, the author could also shop less for clothing and cut back on the amount of money spent on groceries. Substituting clothing already owned and non-name brand foods would help to save money that could go towards paying for the higher gasoline prices. Conclusion There are changes that can be made to make up for the increase in gasoline prices. Some are income effects, some substitution effects, and others still are aShow MoreRelatedThe Macroeconomic Considerations of Rising Gas Prices on the Income and Substitution Effect1667 Words   |  7 Pagesto the income effect and substitution effect, consumers will react differently to various stimuli in the macroeconomic environment. In this instance, the doubling of gas prices will ultimately alter the attitudes, perceptions, and behaviors of consumers. As soon depicted in the scenarios above, rising gas prices will have an adverse effect on consumer behavior To begin, I believe it prudent to discuss the macroeconomic considerations of rising gas prices on both the income and substitution effectRead MoreConsumer Theory and Budget Line1291 Words   |  6 Pagesanswers the question. 1) Guy has an income (Y) of $50 with which he can purchase DVDs (D) at $10 each and haircuts (H) at $20 each. Which one of the following represents Guy s budget line? A) 50 = 10QD + 20Q H B) 50 = QD + QH C) 20Y = QD + 10Q H D) Y = 10QD - 20Q H E) Y = 50 + QD + QH 1) 2) David has an income of $30 to buy movie tickets and bus tickets. The price of a movie ticket is $6 and the price of a bus ticket is $2. What is David s real income? A) $38 B) $30 C) $32 D) 5 movieRead MoreIndifference Curve Analysis1267 Words   |  6 Pagesas bowed. This is due to the concept of the diminishing marginal rate of substitution between the two goods. 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If the consumer’s income hasRead MoreSolutions to Chapter 2 Labour Economics Essay1721 Words   |  7 Pagesat minimum subsistence and who aspire to middle class consumption patterns: This group values income highly relative to leisure, so the indifference curve is relatively flat. As the wage increases, the income constraint line rotates clockwise, and we would expect a relatively large increase in hours worked. This response is dominated by a substitution effect, but there may be a small income effect working in the direction of increased leisure. b) The wealthy who have acquired an abundanceRead MoreIntroduction Of Labor Supply Curve923 Words   |  4 Pagesthat when our income increases we try to long for more leisure. When we assume that both that both income and leisure are normal goods in which more is preferred to less, the average person faces the dilemma of how many work hours he should supply. This phenomenon is known as the income-leisure choice of a worker. By referring to the work-leisure choice model, we may try to understand as how the utility of a worker can be maximized by choosing a certain combination of leisure and income, within a givenRead MoreRegression Analysis On Effect Of Personal Income On Hours Worked Per Week1253 Words   |  6 PagesRegression Analysis on Effect of Personal Income on Hours Worked per Week Formulation of the Question: The main purpose of this paper is to determine whether substitution effect or income effect is dominant in the labor market in America by analyzing the effect of personal income on hours worked per week. Will a high income individual choose to work additional hours in order to generate more income? Or will the same individual choose not to work as much since his income is enough to fulfill hisRead More Demand Curves Essay828 Words   |  4 Pagescharacteristic can be shown by a demand curve. A demand curve is a graphical representation of the data in table with values of demand called a demand schedule. A good that is in greater demand do to income increases is known as a normal good. A inferior good is a good that is in less demand even though the income increases. When this situation occurs the demand curve is positive sloping. A giffen good is a special type of inferior good where demand increases when price increases. The graph below is a sampleRead MoreEffect of Increase of No n-Labor Income in Desired Working Hours1568 Words   |  7 Pages1) Effect of Increase of Non-Labour Income in Desired Working Hours Assuming that the individual has zero non-labour income and faces the income budget line of JZ, the individual would choose point A as the ‘optimal’ utility-maximizing point as it is the highest attainable indifference curve(tangent to the income budget line or MRS = |w/p|). At this point A, the individual will work Ls1 hours, enjoy La leisure hours and enjoy an income of Ca. Assuming the individual has attained a source of non-labourRead MoreHow will a Change in the Interest Rate Change the Future Essay803 Words   |  4 Pagestwo-period model of intertemporal choice tries to interpret based on the current time period (e.g. this month) and a prediction of the future time period (e.g. next month) what consumers will be able to spend, borrow or save according to their levels of income and interest rates. In this assignment however we are mostly concerned on the changes of interest rate and specifically the impact an increase in the level of interest rates would have to c onsumers who are either savers or borrowers in the first period