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    Substitution and income effects for a college student

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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. This year, the price of a round-trip ticket from Chicago to Tuckson increased from $350 to $600. As a result, Kamika decided not to buy a new outfit this year and decided not to drive to Phoenix with friends for an expensive rock concert.

    a. Explain how Kamika's demand for clothing and concert tickets can be affected by an increase in air travel prices.

    b. By using this simple example, explain why both income and substitution effects might be expected to reduce Kamika's number of trips home.

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    Solution Preview

    If the price of air tickets increases and her demand for air tickets remains constant, she will have less money to spend on clothing and concert ...

    Solution Summary

    This solution uses the substitution and income effects to predict how a college student will respond to an increase in the price of round-trip air tickets home.