Alexander studies away from home. While at school, he spends all his income on a

Question

Alexander studies away from home. While at school, he spends all his income on air travel and economics
textbooks. In a diagram with air-travel as the x-axis good, as pair increases while ptext remains unchanged,
Alexander's price consumption path is horizontal.
a. How does Alexander's expenditure on air travel respond to changes in pair? Show that his demand for
air travel is inversely proportional to pair.
b. What is the price elasticity of the demand for air travel?
c. Are textbooks complements or substitutes for air travel?

Explanation / Answer

A. since his consumption between the two goods is horizontal or perfectly elastic, a increase in price of pair inversely effects his demand for air travel. In other words, if P goes up for pair, his demand for pair will go down 1 unit and his demand for air travel goes up one unit. B. Since his demand is perfectly elastic, the price elasticity is equal to his slop of the line which is 0. C. In this case, textbooks are perfect substitutes for air travel. He gains the same utility from consuming both goods

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