Income effect and substitution effect


Problem: 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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Macroeconomics: Income effect and substitution effect
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