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Economics and Income

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Submitted By johnlee21
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The income effect is defined as what happens to your purchases as your level of real income changes. In this example, your income has not changed, but your costs have, which decrease your purchasing power - hence your real income.

The substitution effect is what happens when prices change in relative terms (one thing gets more expensive and/or another gets more expensive).

Note, all goods may have gone up in price due to the cost of fuel for suppliers and/or transportation for you to purchase the good but I took that into account based on the plausibility that it's underlining in the premise of the question (e.g. virtually negligible in C, but cost of gas is still important to answer the question as the health of your vehicle isn't as valuable anymore)

A. Income effect - you have less money to do these things, no substitution has occurred.
B. Income effect (definite) and substitution (plausible, not definite) - the relative price between cooking your own food and eating out may have changed since eating out you have to add a higher % of the cost of a meal to gas.
C. income effect - you have less money to maintain your vehicle and the overall cost incurred from keeping your vehicle maintained has increased.
D. substitution effect and income effect - public transportation is seen as an inferior good (as real income rises, its use decreases). Any decrease in income will produce more consumption of an inferior good. Also the relative cost has changed between two substitutible products therefore this is also a substitution effect.
E. Substitution effect and income effect Same as D
F. Substitution effect and income effect: poorly defined...did you take a vacation at home? Is away mean far away or even a few miles away? or just forego vacation altogether. I'll answer both ways; Vacation is a luxury good that will decrease as income goes down.

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