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Income vs substitution effects

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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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How to distinguish between income and substitution effects

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The income effect describes how consumers react to an increase in purchasing power. For example, if the price of a good they nomormally buy falls, it leaves them with more money to buy other things. The substitution effect describes how consumers reallocate consumption of goods in response to changes in relative prices. So if the price of apples increases, a consumer might want more oranges, which seem more appealing now in light of the increased cost of apples. ...

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