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Income effects and substitution effects

After Iraq invaded Kuwait, gasoline prices rose dramatically--up to 50%. There were many effectrs of the increased price of gasoline. Explain the following effects in terms of the income effect, 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.

Solution Preview

a. people drove less and purchased less gas
Income effect - people could afford less money to purchase gas because the prices shot up
b. people ate out less often
Income effect - Because there was less money left for other things, people ...

Solution Summary

Income effects and substitution effects are considered.

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