An example of the substitution effect dominating the income effect occurs when people take summer vacations rather than winter vacations,even though their pay is the same year-round.

Question

Quizplus · Accepted Answer

The substitution effect refers to changes in consumption patterns due to changes in relative prices, while the income effect relates to changes in consumption as a result of changes in purchasing power. The choice between summer and winter vacations based on constant pay does not directly illustrate the dominance of the substitution effect over the income effect, as it doesn't involve a change in relative prices or purchasing power affecting the decision.

An Example of the Substitution Effect Dominating the Income Effect