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Income effects and substitution effects

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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.

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Solution Summary

Income effects and substitution effects are considered.

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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 ...

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