You own a rock climbing gym. Ryan is one of your customers. Ryan receives utilit

Question

You own a rock climbing gym. Ryan is one of your customers. Ryan receives utility from rock climbing and pizza (Ryan exhausts his income in each period on the two goods). Ryan has $100 of income. At a price of $20, Ryan buys 0 sessions. At a price of $10, Ryan buys 5 sessions. At a price of $5, Ryan buys 12 sessions. At a price of $0, Ryan buys 40 sessions. Previously you ran a promotion at $5 a session and Ryan purchased 10 sessions. However, during that promotion, Ryan’s income was $75, instead of $100. The price is

currently set at $10 per session. Suppose you change the price of a rock climbing session from $10 to $5. Assume that nothing has changed about Ryan’s preferences between the promotion and later price change.

a. What is the income effect of the price change on quantity demanded?

b. What is the substitution effect of the price change on quantity demanded?

Explanation / Answer

At $10 price Ryan buys only 5 sessions and now at $5 price Ryan buys 12 sessions when his income is $100 and bought 10 sessions when his income was $75. Hence the total effect on consumption is 7 sessions with 2 sessions due to the income change and 5 sessions due to the substitution.

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