Fill in the blank. Not sure if this right. 1. (Normal/ Inferior) 2. (Increases/

Question

Fill in the blank. Not sure if this right.

1. (Normal/ Inferior)

2. (Increases/ Decreases)

3. (Increases/ Decreases)

4. (Normal/ Inferior)

5. (Increases/ Decreases)

6. (Increases/ Decreases)

aAplia: Student Question x (4109 unread-rondinosc×eChegg Study Order Confix Roland > C D courses.aplia.com/af servlet/quiz?quiz action-takeQuiz&quiz-probGuld-QNAPC0A801010000002ae009300a0000;&ctx-malkiatsandhul-0077; 7. The substitution and income effects Larry lives in San Francisco, but his girlfriend, Eleanor, lives in Los Angeles. He normally flies down to see her twice a month, but if his income were higher, he would increase the number of flights he took to see her. Air travel is a normal good for Larry. Suppose increased airport security measures raise the price of airline tickets while other prices in the economy remain constant. Because of the higher fares, this month he only flies down once and drives down once instead The overall change in quantity demanded is the result of two effects, which can either move in the same or opposite directions. The substitution effect increases the quantity he demands, and the income effect decreases the quantity of air travel he demands. True or False: This type of good always obeys the law of demand. Q False True Eleanor is on a budget and generally takes the bus to get around the city. If she had more money, she would takee fewer bus trips and more cab rides. Therefore, bus rides are an inferior good for Eleanor. Suppose the cost of bus rides falls, and Eleanor takes more bus rides. The substitution effect increases the quantity of bus rides she demands, and the income effect decreases the quantity she demand. True or False: For goods of this type, the substitution effect usually dominates. Suggestions Q False O True Session Timeout 59:01

Explanation / Answer

Working note:

A good is Normal if, with increase in income, its quantity demanded (consumed) increases. But if quantity demanded decreases with increase in income, the good is Inferior.

Therefore:

(1) Normal [Since if he had higher income, he would fly more]

(2) Substitution effect Decreases the quantity of air travel (Since now air travel is costlier, he will substitute the cheaper goods with the costlier good, that is, air travel).

(3) Income effect Decreases quantity of air travel (Since, due to increased price of air travel, his real income has decreased)

(4) Since income and substitution effect are going in the same direction, this good obeys the law of demand. TRUE.

(5) For Eleanor, bus travel is an Inferior good.

(6) Substitution effect Decreases quantity of bus rides [Since for her, bus ride is inferior good - with price decrease, she will consume less bus rides and more cab rides]

(7) But Income effect Increases the quantity of bus rides [Since real income has now increased]

(8) Substitution effect is generally stronger than income effect. TRUE.

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